De Vivo, G., “Ricardo, David,” The New Palgrave: A Dictionary of Economics, Vol. 4 (Q to Z), John Eatwell et al., eds. (Macmillan Press, 1987), pp. 183–198.

Life and Works

Ricardo was born in the City of London on 18 April 1772 and died at his country seat of Gatcomb Park, Gloucestershire on 11 September 1823. Both his father, Abraham Israel Ricardo, and his mother, Abigail Delvalle, belonged to Sephardic Jewish families (to Ricardo’s Semitic origin has often been ascribed his tendency to abstract deductive reasoning, as for instance by Marshall, who regarded him as un-English: 1890, p. 60n). Both the Ricardos and the Delvalles had strong religious commitments. Abraham Ricardo (at difference from his wife’s family) had only recently settled in England, coming from Amsterdam. He was an affluent stockbroker; David was the third of his at least seventeen children.

The young Ricardo did not have a conventional schooling, and he himself later in life complained of his “neglected education” (Works, VII, 190). However, the idea of Ricardo as an “untutored genius” (Stigler, 1953, p. 326) is certainly a misconception. Indeed, he seems for instance to have attended from the age of eleven to the age of thirteen a Jewish school of high repute, in Amsterdam, with which also Spinoza seems to have had some relations. More generally, by the affluent conditions of his family, Ricardo “was allowed any masters for private instruction whom he chose to have” (as his brother Moses wrote in a Memoir, now reprinted in X, 3–13). Given that, “when young, [he] showed a taste for abstract and general reasoning” (X, 4), he would not have missed the opportunities allowed by his family’s circumstances.

At the age of fourteen, he started his business career, working with his father. At the age of 21, a breach was caused with his family by his marriage to Priscilla Ann Wilkinson, a Quaker (“to the Sephardic Jew a son marrying outside of the faith was as one whose name passed out of the family circle and for whom the memorial prayer for the dead was recited”: Hollander, 1910, pp. 33–4). Therefore he was thrown “upon his own resources”—his brother tells us—but was in fact succoured by some of  “the most respectable members of the Stock exchange” (the banking firm of Lubbock, Forster, & Co., later absorbed by Coutts), and was thus allowed to pursue an independent career as a stockbroker, which was to be extremely successful. In a few years, he made a great fortune: at his death, his estate was worth something between ₤675,000 and ₤775,000, out of which he had been enjoying a yearly income of about ₤28,000 (X, 103).

By the age of 25, thanks to his “lessened solicitude” for his business, he “tuned his attention to other subjects,” chiefly mathematics, chemistry, mineralogy and geology (he was one of the early members of the Geological Society of London, like his friend and fellow economist William Blake). In 1799, at the age of 27, during a stay at Bath, he happened to borrow a copy of the Wealth of Nations, of which he soon became “a great admirer” (VII, 246). His interest in political economy could not but be enhanced by the events of those years. Indeed, it was just towards the end of 1799 that the first effects of Britain’s departure from a gold standard (decided in February 1797) started to be felt, with a fall of the Hamburg exchange and the appearance of a premium of gold upon paper money. As Bagehot put it, it was “the peculiar circumstances of his time [which] conducted Ricardo to the task for which he was most fit. He did not go to political economy—political economy, so to say, cam to him” (1888, p. 344).

Ricardo’s life as an active economist only lasted fourteen years: his first publication, an article on “The Price of Gold” in the Morning Chronicle, appeared 29 August 1809 (the article, as was then generally the case in newspapers and reviews, was anonymous). This article (which was followed by two letters defending it against some critics) had been prompted by the sharp rise in the paper price of gold and the corresponding fall in the external value of the pound which happened that summer, after some years of relative calm. (For the facts of the 1797–1819 suspension of the gold standard, see Hawtrey, 1930, ch. 18.)

While Ricardo’s contributions in the Morning Chronicle did not apparently attract much notice (but Cobbett did notice them), this was not the case for his subsequent work, The High Price of Bullion, a Proof of the Depreciation of Bank Notes, where he recast and developed the arguments put forward in the Morning Chronicle contributions. This pamphlet, published in the first days of 1810, had reached a fourth edition by April 1811. In fact, scarcely a month after its publication, Francis Horner moved in the Commons for “an inquiry into the causes of the present high price of bullion, and the consequent effect upon the value of paper money” (Horner, 1853, II, p. 1), and this led to the celebrated Bullion Report (published August, 1810). The very phrasing of Horner’s motion appears as a confirmation of the influence of Ricardo’s pamphlet on the appointment of the Committee, and in fact Horner himself seems to have regarded Ricardo (together with Mushet) as the originator of the movement which led to the Report (Horner, 1853, II, p. 24). Thanks also to the fact that the Report shared most of Ricardo’s positions (but he himself by no means agreed with the whole of it: III, 347ff.), he became one of the leading figures of the “Bullion Controversy.” He defended the Report in three (anonymous) letters to the Morning Chronicle (in September 1810), and it was again he who, in January 1811, replied with a pamphlet to one of the most effective attacks on the Bullionist position, Bosanquet’s Practical Observations on the Report of the Bullion Committee.

By this time, Ricardo had established his reputation as an economist, and felt confident enough to write to the Chancellor of the Exchequer (July 1811) and to one of the leaders of the Opposition (December 1811), suggesting the adoption of a plan for the resumption of cash payments (on this plan, see below).

Ricardo’s participation in the Bullion Controversy led to his intimacy with James Mill (whom he had first met after the publication of Mill’s Commerce Defended in 1808) and with T.R. Malthus, then the foremost British economist, who reviewed Ricardo’s High Price of Bullion and Reply to Bosanquet in the February issue of the Edinburgh Review. (Ricardo answered Malthus’s comments the following April with an Appendix to the fourth edition of The High Price of Bullion.)

The friendship with Mill was to be important for Ricardo on a practical plane, in helping him to attain his “anxious desire to produce something worth publishing,” which he himself  “unaffectedly fear[ed]” would not be in his power to do (VII, 88). Mill played the rôle of a “schoolmaster” (VI, 321), setting tasks to Ricardo in order that he might improve his literary skills. He helped Ricardo in his moments of despondency about his capacity to write, sometimes even reproaching him, as becomes a schoolmaster (“I shall begin by and bye to think that your misgivings, and your faintness at heart, are apologies ingeniously contrived by you in defence of your idleness”: VII, 59). Mill was also important in that he always pressed Ricardo to propagate what they sometimes indicate as “the right faith” (VII, 36) with “his tongue, as well as his pen” (VI, 138). As early as Autumn 1814 he was urging Ricardo to enter Parliament. Ricardo resisted these designs for some time, but in the end was convinced. In February 1819 he entered Parliament as the Member for Portarlington, an Irish rotten borough (with some twelve electors).

Ricardo’s friendship with Malthus was instead mainly important for their economic discussions. Ricardo himself wrote:

My discussions with Malthus have been innumerable, and in my eagerness to convince him that he was wrong, on some points on which we differed, I was led into a deeper consideration of many parts of the subject than I had before given them, and though I have failed to convince him, and may not have satisfied others, I have convinced myself; and think that I have a very consistent theory in my own mind (VII, 246).

(Ample records of these discussions have reached us, in the extensive correspondence between them, and in Ricardo’s Notes on Malthus’s Principles.)

After 1811, the monetary controversies before the general public subsided, and Ricardo did not publish anything else until 1815. His interest in political economy however did not lapse, and he continued to be engaged in private discussions on monetary points (especially with Malthus). In August 1813, however, their correspondence records a move from the “old question” to one on the effects of the opening of new markets—in particular, its effects on the rate of profits. This was probably connected with the issue of the restrictions to the corn trade which had been raised before Parliament in the first months of 1813. The discussion caused Ricardo to go into the question of whether an increase of capital diminishes profits, and into the theory of distribution. By March 1814 he had written some “papers on the profits of Capital” (which are not extant), and in February 1815, when “the question of the Corn Laws came before Parliament for the third year in succession” (Smart, 1910, p. 445), Ricardo published his Essay on the Influence of a Low Price of Corn on the Profits of Stock; Shewing the Inexpediency of Restrictions on Importation (now generally known as Essay on Profits). The free trade party was however defeated, and a very restrictive Corn Law was passed by a large majority the following month.

By this time, Ricardo had decided to abandon his business in the Stock Exchange, and stared to transfer his money into landed estates (he had already acquired his residence of Gatcomb Park, which he thought would allow him not to “sigh after the Stock and its enjoyments”: VII, 115).

The great profits that he made on the Government loan for which he had been one of the successful bidders just four days before [the Battle of] Waterloo (18 June 1815), induced him to devote more time to political economy (which he now called his “favourite subject”), and it was the theory of distribution which mainly engaged his attention. By 1817, with the publication of his Principles, he came to regard it as “the principal problem in Political Economy” (I, 5).

In the period between the Essay on Profits and the Principles, consideration of monetary questions is generally not taken up at his initiative—as happened for instance in August 1815, when P. Grenfell, an influential speaker on financial questions, asked Ricardo to help in his Parliamentary battle against what he regarded as the excessive profits of the Bank of England. Ricardo, who thought [of] the Bank as “an unnecessary establishment getting rich by those profits which fairly belong to the public” (VI, 268), responded positively and by September had written a pamphlet, Proposals for an Economical and Secure Currency, which was published in February 1816, shortly before the debate on Grenfell’s motion on the Bank. This pamphlet contained a detailed account of his plan to make the Bank of England resume cash payments by making its notes convertible into gold ingots, instead of coins. This would have allowed Britain to go back to a gold standard, but to use paper as the actual means of payments. This plan Ricardo had first outlined in the Appendix to The High Price of Bullion, and submitted to both Government and Opposition (as mentioned above). It was to receive much attention in 1819, when the decision was taken to return to a gold standard, and it was in fact adopted, and implemented in 1821, when the resumption of cash payments actually took place (see below). It gave Ricardo a long-lasting fame: when in 1925 Britain returned to gold, “Ricardo’s Ingot Plan” was still referred to (see, e.g., Keynes, 1925, p. 357), and adopted.

In that same summer of 1815, when Ricardo wrote Economical and Secure Currency, Mill was already pushing him to prepare a new and enlarged edition of the Essay on Profits. (This in the end resulted in the writing of Ricardo’s main work, On the Principles of Political Economy, and Taxation). By October 1815 Ricardo appears to have been convinced, and even desirous to write a book at last (VI, 314). He already conceives it as an inquiry upon “the Principles of Rent, Profit and Wages”:

These principles are so linked and so connected with everything belonging to the science of Political Economy that I consider the just view of them as of the first importance. It is on this subject, where my opinions differ from the great authority of Adam Smith Malthus &ca, that I should wish to concentrate all the talents I possess not only for the purpose of establishing what I think correct principles but of drawing important deductions from them (VI, 315–16).

This in fact he did in the book which was eventually published in April 1817.

It was particularly in the process of writing the Principles that Mill’s encouragement and practical assistance proved very important to Ricardo. To this period belongs Ricardo’s acquaintance with J.R. McCulloch, who was to become a “tireless salesman of Ricardian economics” (Fetter, 1965, p. 424). In 1816 McCulloch introduced himself to Ricardo, sending him a complimentary copy of a pamphlet. In June 1818 he reviewed the Principles in the Edinburgh Review, bestowing undiluted praise upon it, though showing some misunderstandings (which Ricardo did not notice in the first place, but which were spotted by his friend H. Trower). The review was, however, very effective in boosting the sale of the book (to Malthus’s not too well disguised disappointment). A few months later Murray, Ricardo’s publisher, applied to him for permission to print a second edition (only 750 copies had been printed of the first). This second edition, with “a few very trifling alterations,” was published in February 1819. A third edition, with extensive changes especially in the first chapter, “On Value,” was published in May 1821.

Ricardo seems to have said that no more than twenty-five people in England could have understood his book (VII, 376–7n.), but there is little doubt that by now he was quite famous, thanks also perhaps to the fact that political economy in those years had become very fashionable.

In 1818, Ricardo was asked to give evidence before the Commons Committee on the Usury Laws (he declared to be in favour of their repeal). In February 1819, as already mentioned, he entered Parliament, where a new bout of the controversy on the suspension of the cash payments had started, and both Houses had set up a Committee to consider the issue. Ricardo’s plan for ingot payments was high on the agenda of these Committees. Ricardo himself was asked to give evidence before both of them, and he declared himself to be in favour of immediate resumption. One of his first speeches in the Commons was on the resolutions embodying the recommendations of the Committee. (A resumption by steps was decided, which in two years would have made pounds convertible into bullion at the pre-suspension price of ₤3.17.10½ per ounce; convertibility into coin would have ensued after a year). As the newspapers reported, Ricardo rose to give his speech “amidst loud invitations” (V, 9n.).

In the four and a half years Ricardo was in Parliament, as indeed in virtually the whole of his adult life, the Tories were in office (Lord Liverpool was the Prime Minister from 1812 to 1827). Ricardo did not attach himself to any of the parties. On general questions he tended to side with the Opposition, as for instance on Reform of Parliament (he was a staunch advocate of a moderate reform, as “the most efficacious preventative of Revolution”; VIII, 49), and on civil liberties ([the] Peterloo [Massacre] happened just a few months after he had entered Parliament, and he voted against the “Gagging Acts” which virtually suspended the Constitution). On monetary questions, however, he found himself increasingly on the Government’s side.

Besides monetary questions, many of Ricardo’s speeches were devoted to financial problems. The war had swelled the national debt, as well as taxation. Retrenchment after the war basically consisted in the abolition of the main direct tax (the income tax). In the Budget of 1819, the Chancellor of the Exchequer proposed a heavy increase of indirect taxation. Ricardo, who was “an enemy to taxation altogether” (V, 26), in the debate on the Budget gave hints of a plan to repay the whole of the national debt in four or five years, by means of a tax on property. This proposal, which of course met with little favour, seems to have caused Ricardo’s reputation in the House to change into that of “a theorist” (Baring defined the proposal as that of “a man who might calculate well and read deeply, but who had not studied mankind”: V, 270). Ricardo had always resented “the vulgar charge … against theorists’ (III, 160), and used to attack men who are “all for fact and nothing for theory” (“Such men can hardly ever sift their facts. They are credulous, and necessarily so, because they have no standard of reference”: III, 180). He often complained of the changed attitude of the House towards him.

In September 1819, Ricardo reluctantly accepted an invitation to write an article on the Sinking Fund for the Supplement to the Fourth, Fifth and Sixth Edition of the Encyclopaedia Britannica, edited by M. Napier. He was, of course, far from contrary in principle to the Sinking Fund, the object of which was (or ought to have been) the diminution of the national debt. But he wrote against the perversion of the Sinking Fund from its original purpose, which had happened in past experience (and, according to Ricardo, was bound to happen in the future). Part of the article dealt with the more general question of the mode of providing for public expenditure. The article met with the warm approval of both Mill and McCulloch. The latter insisted that it was not just an article on the Sinking Fund, but on the funding system in general. And with the title “Funding System” it was actually published (September 1820).

The years 1821 and 1822 were a period of severe distress in agriculture, and in both years a Committee on Agriculture was appointed by the Commons. Ricardo served on both of them, and a by-product of this was a pamphlet on Protection to Agriculture (April 1822). The distress was mainly due to low prices (the price of corn in 1822 reached a historical minimum), and the increased real burden of taxation, again due to the fall of prices. The agriculturalists blamed the distress upon the deflationary policy linked to the return to gold. Ricardo, both in Parliament and in his pamphlet, claimed that the appreciation of the currency due to the resumption did not exceed ten per cent—half of which, he thought, was due to the conduct of the Bank directors, who, being “ignorant of the principles of currency,” had not followed his plan of bullion payments, and with their purchases of gold to be coined had caused an unnecessary rise in its value. Moreover, he maintained that the increased burden of taxation could not explain the crisis, which was peculiar to agriculture, because it affected all trades more or less in the same degree (though he reluctantly made some concession to the particular position of the landholder with respect to taxation).

Ricardo thought the distress was of a temporary nature, because according to him the cause of the fall in corn prices was excess of production. (Abundance of corn was not a curse to the country, but certainly to the producer of corn: “If we lived in one of Mr. Owen’s parallelograms, and enjoyed all our productions in common, then no one could suffer in consequence of abundance, but as long as society is constituted as it now is, abundance will often be injurious to producers, and scarcity beneficial to them”: IV, 222). However, he did not miss this opportunity to attack the Corn Laws. They allowed corn to be grown at a much higher price in Britain than abroad, and this deprived the corn grower of one of the chief remedies to excessive production, namely exportation. Also, he blamed the absurd mechanism according to which no importation of corn was allowed until a certain (very high: 80 shillings per quarter) price was reached, but when it was reached, the ports were thrown open for three months, no matter what happened in this period to corn prices. To remedy these evils, Ricardo proposed a scheme which ought by steps to have replaced this mechanism with one of freedom of importation, coupled with a duty on importation to “countervail the peculiar burthens to which the grower of corn is subject” in Britain (he generously fixed it at 10 shillings per quarter), and a parallel drawback on exportation (7 shillings per quarter). The proposal was duly rejected by the Commons (only twenty-five voted in favour).

The last of his works which Ricardo prepared for publication was a Plan for the Establishment of a National Bank, which he wrote in the Summer of 1823. It was published in February 1824, when Ricardo had been dead for about five months, and was seen through the press by his brother Moses. The plan (which Ricardo had already outlined in the Principles) consisted in taking the privilege of issuing paper money from the Bank of England, and entrusting it to a “National Bank,” which would have issued it on behalf of the Government. The Commissioners of this National Bank would have been granted total independence from the Government, and would have acted “as the general banker to all the public departments, and only to them” (IV, 289). They would have not been allowed to lend money directly to the Government, but only to buy Government securities “in the open market.” This scheme would, according to Ricardo, have made the issue of paper money more independent of the Government than it then was. The main effect of the plan would have been to deprive the Bank of England of the profits it derived from the issue of paper money, leaving it as an ordinary banking institution. This followed the conception, which Ricardo had entertained for a long time (see above), that the Bank of England was an unnecessary institution, making profits which “fairly belong to the public.” No inconvenience would have been caused to the public, even in case the Bank of England, in consequence of the plan, went out of business altogether. (Ricardo’s plan was to prove influential in 1844, when the separation of the Issue Department from the Banking Department of the Bank of England was decided with the new Bank Charter Act.)

Ricardo’s attention during the last period of his life was however devoted rather to the theory of value than to money and banking. The problem of an invariable measure of value had haunted him since the publication of his Principles, and was very much at the centre of the discussions he had in this period with his economist friends. In particular, Malthus’s Measure of Value, published in April 1823, had triggered a discussion not only with Malthus himself, but also with Mill and McCulloch, who on this subject strongly disagreed with Ricardo. As a result of these discussions, Ricardo, in the very last weeks of his life, wrote a paper, where he critically reviewed the measures and theories of value severally advanced by his opponents. The paper at Ricardo’s death passed into the hands of Mill, who judged it not suitable for publication (as a matter of fact, Ricardo had only finished a rough version). It fell out of sight and of memory, until it was again brought to light with the Sraffa-Dobb edition of Ricardo’s works.

Ricardo’s death came quite suddenly on 11 September 1823, as a consequence of an ear infection. He was survived by his wife Priscilla, and seven of their eight children (a daughter, Fanny, had died in 1820). Ricardo’s estate was divided between them, with a striking discrimination against his daughter (“the portion of a son being no less than eight times the value of that of a daughter”: X, 104). His wife was granted an annuity and an additional bequest. Besides lesser bequests and annuities to other relatives, he also bequeathed a sum of money to his friends G. Basevi, Thomas Malthus, and James Mill. (For further details on Ricardo’s life, see Part I of Hollander, 1910, and volume X of Ricardo’s Works).


There can be little doubt that Ricardo is to be numbered among the exponents of the quantity theory of money, and one of the most rigid at that. The bulk of his writings on money belong to the Bullion Controversy of the early 1810s; they are among the best known and most widely acclaimed of his works. There was little if no change in Ricardo’s monetary thought in the later part of his life, as far as general principles are concerned. It is certainly true that, as noticed for instance by Viner (1937, p. 141), in his 1819 Parliamentary evidence on the resumption of cash payments Ricardo appears less rigid, and allows that the strict principles he had earlier advocated could be qualified, but this does not really depend upon a change in his theoretical positions, but rather reflects the very nature of that contribution: an oral argumentation with the members of the Committees. Moreover, the emphasis of the enquiry was rather on the practical than on the abstract aspects of monetary problems, and it is on practical matters that Ricardo appears to make concessions.

Although Ricardo’s ideas on money did not themselves undergo major changes, this is not the case for the other parts of his theory, notably value theory. In the early 1810s, he entertained the notion that “gold and silver, like all other commodities, have an intrinsic value, which … is dependent on their scarcity, the quantity of labour bestowed in procuring them, and the value of the capital employed in the mines which produce them” (III, 52). This is very different from his later conception of scarcity as only influencing the value of non[]reproducible commodities (“a very small part of the mass of commodities daily exchanged in the market”: I, 52). Ricardo’s early idea that scarcity is a regulator of prices alongside cost of production, is (partly also thanks to its vagueness) much more in accordance with a quantity theory of money than his later labour theory of value, whose consistency with his monetary theory is problematic. These problems of consistency Ricardo failed to solve, and to a large extent even to consider. Our review of his theory in the present section will deal only with the monetary theory to which Ricardo adhered throughout. The problems which this basic framework later faced will be discussed below, in the section on foreign trade and international gold movements.

As becomes a quantity theorist, Ricardo formulates what is now generally known as the equation of exchange: “put the mass of commodities of all sorts on one side of the line, – and the amount of money multiplied by the rapidity of its circulation on the other. Is not this in all cases the regulator of prices?” (III, 311).

To interpret the equation of exchange in a causal way, as “the regulator of prices,” Ricardo has of course to deny that there is a functional relationship between the quantity of money and velocity of circulation, or output levels (“the mass of commodities”). As to the first point, he does not deny that the velocity of circulation can vary, but regards it as depending on the development of the credit system and the banking habits of the public, and could be therefore basically treated as an institutional datum. Where Ricardo’s position appears weaker is in his denial that variations in the amount of money can generate changes in the level of output. He allows that changes in the quantity of money can have real effects through the changes in prices they would generate. For instance, he concedes that money wages are slow to adapt to changes in price levels, and therefore a rise in prices could cause a fall in real wages, and this, allowing more labourers to be employed (III, 302), could have positive effects on the levels of production (see also VI, 16). Ricardo, however, regards such effects of price changes as of only temporary nature and trifling importance, also because they were in his view countervailed by negative effects on savings, due to the parallel fall in the real incomes of the classes “who are in possession of fixed monied rents and annuities,” who have a high propensity to save (VI, 16). He therefore in general sticks to his view that “money cannot call forth goods” (III, 301), the main justification of which seems to be that “the funds for the maintenance of labour” are somehow given and fully utilized (see e.g. I, 143, 164; this partly foreshadows the wages-fund doctrine which the Ricardians later developed and rigidily adopted). Ricardo also seems to regard capacity as fully utilized (see e.g. V, 436, 438). That his argument is of this kind is also indirectly confirmed by the fact that he seems more inclined to accept that in the case of falling prices, significant changes in levels of production may take place (his argument would in fact be asymmetrical). No read discussion of the point is however to be found in his writings. It perhaps seemed so obvious to him as not to require much attention (perhaps also because he must have regarded the opposite view as based on a confusion of money with capital).

A crucial point in Ricardo’s argument in favour of the quantity theory, is the demonstration that any amount of money would be absorbed by the system, and would not “overflow.” His reasoning is the following. An increase in the quantity of money would in the first place lower the rate of interest. The rate of profits would not change, because it is determined by real factors (in the early 1810s, Ricardo entertained the vague notion of Smithian origin, that the rate of profits is determined by “competition of capitals not consisting of circulating medium”: III, 92; a view he later rejected, though retaining the point that the rate of profits is wholly determined in the real sphere). An indefinitely great amount of money will be applied for, because

the applications to the Bank for money … depend on the comparison between the rate of profits that may be made by the employment of it, and the rate at which they are willing to lend it. If they charge less than the market rate of interest, there is no amount of money which they might not lend (I, 364; see also III, 91).

This additional money “would be sent into every market, and would every where raise the prices of commodities” (III, 91). What was initially an excess of money would therefore become necessary to circulate the commodities at these higher prices. Ceasing the excess of money, the rate of interest would rise back to the level of the rate of profits. The change in the amount of money in the end would affect only the level of prices.

The above reasoning is, according to Ricardo, applicable to paper money (both convertible and inconvertible), and to gold, so that the principle that “circulation can never be over-full” (III, 91) always holds. But there are differences in the full effects of an increase in the quantity of money between the three cases.

In the case of a circulation consisting of gold, an increase in its quantity would raise all prices in terms of gold—i.e., it would lower the value of gold; being increased in quantity, gold is diminished in value, consistently with the notion that scarcity is a determinant of commodity values. (For money consisting of gold, the effect on prices of a change in its quantity can be direct, and does not necessarily require the mechanism outlined above). Gold therefore becomes “the cheapest exportable commodity” in the country, say England. This causes England to have what is (wrongly, according to Ricardo) termed “an unfavourable balance of trade”—an importation of commodities (other than gold) settled with gold exports (“the exportation of the coin is caused by its cheapness, and is not the effect, but the cause, of an unfavourable balance of trade”: III, 61). The increase of gold therefore spreads over the rest of the world, and prices settle at a higher level not only in England (where their rise originated), but also in the other countries.

If the increase was one of an inconvertible paper money, all English prices would be raised, including that of gold. This would create an excess of imports over exports for this country, because “the balance of payments … [is] guided a great deal by the relative value of the currencies of the two countries” (V, 395)—i.e., by the relative price of English and say Dutch commodities. There would be an excess of bills on London over bills on Amsterdam, and therefore a bill on London which previously cost 100 florins would now cost say 90 florins (the pound value of bills on Amsterdam would correspondingly rise). This fall in the pound exchange (which acts on English trade as a duty on importation and a bounty on exportation, and conversely on Dutch trade) would only stop when the value of the pound had fallen enough to restore an equilibrium in the payments between the two countries. The new level of the exchange must be such as to make gold of nearly equal price (if expressed in the same currency) in the two countries (the percentage difference being within the percentage cost of sending gold from one country to the other).

If Bank of England paper had instead been convertible into gold at a fixed rate—the “Mint price” of gold—the fall in the pound exchange could not have gone beyond the percentage cost of sending gold from England to Holland. At this level in fact it would be cheaper for an English importer to obtain gold from the Bank of England (a the Mint price) and send it to Holland, rather than settling his debt by buying a bill on Amsterdam. Once the gold export point (“the natural limit to the fall of the exchange”) had been reached, any further increase of paper money would therefore cause a loss of gold to England. This could initially push things back towards the previous equilibrium, because the increase of gold abroad would raise prices there, while prices in England would not further rise, until paper money had replaced all the gold coin which might have been in circulation. If the issue of paper continued after this, the Bank of England would see its coffers progressively emptied of gold. It would therefore be forced to stop it, and restore the value of money by reducing its issues.

The above apparatus is put to work by Ricardo in the controversies on the English monetary system. His point of departure is the consideration that a change in the purchasing power of money is an unjust interference with the relations between the different classes of society. He therefore declares the best monetary system [to be] that which renders the value of money least variable. According to him, no invariable standard is available, but he thinks gold the best approximation to it (at one stage however he preferred silver). In any case, a variable standard is better than no standard, because “without a standard [the currency] would be exposed to all the fluctuations to which the ignorance or the interests of the issuers might subject it” (IV, 59). He maintains that during the suspension of cash payments paper money had been issued in excess, as shown by the paper price of gold being above the Mint price, and by the fall in the exchange, which had gone much beyond the gold export point.

It is to be remembered that Ricardo defined money as being “in excess” when the money price of gold was higher than the Mint price: it was in excess with respect to the amount which would have ceteris paribus made them equal. This was a bit of (no doubt involuntary) trickery: thanks to it Ricardo could consistently talk of money as being “in excess” even when its amount had actually diminished, and the rise of prices was to be ascribed to the causes which in the definition are kept at bay by the ceteris paribus. It strongly suggested that the sound policy in case of a rise in prices always was the one he advocated: a reduction in the quantity of money. According to Ricardo, in fact, by whatever cause a change in the price of the standard (i.e. gold) might have been generated, it had to be countervailed by variations in the amount of money. (Ricardo maintained that paper money was depreciated and therefore, according to his definition, “in excess,” even if the rise in the paper price of gold had been caused by variations due to gold, and the paper prices of all commodities other than gold had not changed: V, 387: see also IV, 335; I, 149).

The monetary system which Ricardo would have liked to see established in England was one where only paper money would be used, freely convertible into gold bullion at a fixed rate. This system would have approached nearest his definition of perfection: “A currency may be considered as perfect, of which the standard is invariable, which the utmost economy is practised” (IV, 55).

As is often the case with quantity theorists, Ricardo thought that the importance of money could be exaggerated (see, e.g., IX, 100). According to him, “productions are always bought by productions, or by services; money is only the medium by which the exchange is effected” (I, 292)—an idea he had very early accepted, taking it from Mill’s Commerce Defended of 1808, or from Say’s Traité of 1804. Ricardo sees money only “as an intermediary in the exchange of products” (as Marx writes: 1862–3, II, p. 501), and therefore he in fact equates a monetary and a barter economy. Thus he does not see the important point that will be made by J.S. Mill (and by Marx after him): “in the case of barter, the selling and buying are simultaneously confounded in one operation; … the effect of the employment of money … is, that it enables this one act of interchange to be divided into two separate acts,” and therefore to render crises (“period of general excess”) possible (Mill, 1844, p. 70; for Marx’s views, see 1862–63, II, p. 492ff.). According to Ricardo, instead, “to save is to spend” (II, 499), and “a general glut of all commodities … is evidently impossible” (III, 108). He kept to this so-called “Say’s Law”[1] with much more consistency than Say himself.

Parallel to the denial of the importance of money, runs the idea that the precious metals are commodities like any other, and have no peculiarity due to their being used as money: “There does not appear to me to be any substantial difference between bullion and any other commodity, as far as regards the regulation of its value, and the laws which determine its exportation or importation” (VI, 24). The exportation of gold (an “unfavourable balance of trade”) is only caused by its being “the cheapest exportable commodity.”

The shortcomings of Ricardo’s position are made manifest in his criticism of Thornton, who had maintained that gold is partly different from other commodities, being “that article by which a balance of trade is discharged, and not as itself constituting a commodity” (1802, p. 145). Thornton had accordingly maintained that harvest failures, and foreign expenditure of government for subsidies or war, could be causes of an unfavourable balance of trade, whereas Ricardo claimed that an “unfavourable balance of trade” is always caused by redundancy of money.

According to Ricardo, the effect of a deficient harvest is a redundancy of money, because it diminishes the amount of commodities to be circulated. Gold therefore would have its value lowered in terms of commodities (Ricardo is of course referring to a case of metallic money), would become “the cheapest exportable commodity,” and be exported. There could be no other reasons for an exportation of gold: “Mr Thornton has not explained to us, why any unwillingness should exist in the foreign country to receive our goods [rather then bullion] in exchange for their corn” (III, 61). On foreign expenditure, however, Ricardo was less firm, and was still struggling with this problem in 1823, as shown by his discussion of Blake’s pamphlet on the effects of government expenditure (IV, 323ff.; cf. Marx, 1859, p. 179: “Ricardo seems to have completely misunderstood the rôle which subsidies played in British gold export”).

Ricardo came under attack on these points from Malthus (himself a bullionist), who observed that he overlooked that the precious metals are in the particular situation of “having been constituted, by the universal consent of society, the general medium of exchange, and instrument of commerce”—or, in Huskisson’s words, the “universal equivalent” (Malthus, 1811, p. 345; he refers to Huskisson, 1810, p. 579). Therefore bullion “will pay a debt of the largest amount at its nominal estimation,” whereas there could be “an unwillingness of the creditor nation to receive a great additional quantity of goods not wanted for immediate consumption, without being bribed to it by excessive cheapness” (Malthus, 1811, p. 345). Accordingly, Malthus maintains that in case of a deficient harvest, “the exportation of bullion was the effect of a balance of trade, originating in causes which may exist without any relation whatever to redundancy or deficiency of currency,” and not its cause (ibid., p. 342; see also VI, 21). Ricardo was apparently unable to see the point; he simply answers that his critics “express the option they are endeavouring to controvert, viz. that when goods cannot be sent so advantageously as money, money will be exported” (III, 101). He accuses those who claim that the laws which regulate the export and import of bullion are different from those of other commodities, of sharing mercantilist prejudices—a weapon to which quantity theorists like to recur (Marshall for instance uses it, quoting Ricardo’s reply to Malthus at length, in his evidence before the Gold and Silver Commission in 1887: pp. 117–18).


It has already been mentioned that Ricardo’s attention turned towards the theory of distribution between the spring and the summer of 1813, when the question of the relation between an increase of capital and the rate of profits starts to appear in his correspondence with Malthus.

We know that Ricardo had in his 1809–11 writings on money subscribed to Smith’s view that the rate of profits depends upon “competition of capitals” (see above). By August 1813, however, we find him speaking of a theory of his own (VI, 95), that he opposes to Malthus’s conception (very similar to Smith’s) that the rate of profits depends “upon the state of capital compared with the demand for it” (VI, 111)—or, more in general, that “the proportion of demand to the supply … is always the main point in question, as determining prices and profits” (VI, 117).

According to Ricardo, “nothing … can increase the profits permanently on trade, with the same or an increased Capital, but a really cheaper mode of obtaining food”: “in short it is the profits of the farmer which regulate the profits of all other trades” (VI, 104). Malthus instead maintains that “the profits of the farmer no more regulate the profits of other trades, than the profits of other trades regulate the profits of the farmer” (ibid.). On this basis, Ricardo claims that restrictions to importation of corn, by causing worse conditions of production of corn, would render food more expensive, and therefore lower the rate of profits. Malthus instead maintains that restrictions to the importation of corn could raise the rate of profits.

As Sraffa has explained, Ricardo’s position at this stage had as its “rational foundation” the idea that “in agriculture the same commodity, namely corn, forms both the capital (conceived as composed of the subsistence necessary for the workers) and the product” (I, xxxi). To the extent that this was true, the rate of profits in agriculture would be determined as a ratio between these two quantities of corn (“a material rate of produce,” as Malthus referred to it: VI, 117), and therefore irrespective of the conditions of production of the other commodities, and their prices. It would only depend upon the conditions of production of corn, and the amount of corn given as wages to each labourer.

This “corn-ratio” theory of profits (as Sraffa has called it: I, xxxiii) is at the centre of the debate between Ricardo and Malthus, in the period going from the summer of 1813, to the publication of Ricardo’s Essay on Profits in February 1815, to the following summer. Malthus repeatedly objects to what he calls Ricardo’s “peculiar opinions,” and in particular to the view that “agriculture always takes the lead in the determination [of the rate of profits]” (VI, 153). Malthus accepts that Ricardo’s theory is “simple just and consistent as far as it goes,” but writes that Ricardo is “wrong in the application of it,” in that he “expect[s] similar results when the premises are essentially different” (VI, 216).

In fact, Malthus had rather early objected to Ricardo that his theory did not pay sufficient attention to prices (VI, 141), and in March 1815, shortly after the publication of Ricardo’s Essay, he gets at the vital objection to Ricardo’s argument: if one allows for non-corn elements in the capital employed in agriculture, the rise in the cost of production of corn, and therefore in its price, caused by a worsening in its conditions of production, would imply a diminished value (in corn) of those non-corn elements of the agricultural capital. This could (and, according to Malthus, would) “occasion the whole mass of corn to be raised at a less corn expenditure; and consequently will leave a larger surplus,” and allow a higher rate of profits. Malthus rightly stresses: “This, if true, is a most important principle and deserves to be thoroughly considered” (VI, 191). Ricardo, of course, could not deny it (“Your statement is … very ingenious”: VI, 193).

The result of Malthus’s “ingenious statement” was to bring prices very much to the fore in the discussion. Ricardo very soon realizes that everything depends upon the magnitude of the variation in the prices of manufactured commodities relative to corn when the conditions of production of corn worsen. He is however rather unclear on what the rules are according to which this variation of prices would take place. Thus we find him sometimes supposing that prices would vary in proportion to the variation of wages, or in proportion to the variation in the amount of labour necessary to produce the commodities (VI, 193), or that they would not materially vary (VI, 213). Different rules of course yield different results. Ricardo seems baffled (“The whole appears to me a labyrinth of difficulties; one is no sooner got over than another presents itself”), and stresses the simplicity of his own solution (“my simple doctrine … accounts for all the phenomena in a easy, natural manner”: VI, 214).

Ricardo’s “corn-ratio” theory of profits also entailed a rule for the determination of the prices of manufactured commodities relative to corn: given the rate of profits of agriculture, the price of the product of any other trade had to be such, relative to its capital (corn), as to give the same rate of profits as that established in agriculture. But this simple rule (which is never spelled out in Ricardo’s extant writings) stands or falls with the agricultural determination of the rate of profits. It is remarkable the extent to which Ricardo appears to be at a loss, once prices really enter the story. Indeed, prices are hardly ever considered by him (at least explicitly), before Malthus makes his “ingenious statement.” This no doubt reflects the secondary role prices play in a “corn-ratio” theory of profits.

It can safely be affirmed that it was to his 1813–15 discussions with Malthus on the theory of profits, that Ricardo was referring when he wrote of the importance of his discussions with Malthus, in leading him “into a deeper consideration of many parts of the subject” (see above). Indeed, Ricardo was forced by these discussions to abandon his corn-ratio theory, and to give a stronger basis to his positions, i.e., to build a more general theory. As has been mentioned, his Principles was born out of an attempt to produce a second edition of the Essay on Profits.

The book On the Principles of Political Economy, and Taxation, as we already know (see above), was from the beginning conceived by Ricardo basically as a work on the theory of distribution. It consists of thirty-two chapters (thirty-one in the first two editions), but only the first seven constitute the Principles of Political Economy proper (see I, xv). The following eleven chapters deal with taxation, and chapters from nineteen to the end are a set of polemical dissertations on miscellaneous subjects. Six of the seven chapters on the principles of political economy are devoted to the theory of value and distribution (the seventh to foreign trade).

The main difficulty which Ricardo encountered, in the passage from the Essay to the Principles—and, correspondingly, the main novelty in this book—was of course the theory of value, which occupies the first (and by far the longest) chapter in the book. When starting to work on the Principles Ricardo wrote: “I know I shall soon be stopped by the word price” (VI, 348).

The theory of profits of the Principles is essentially the same as that of the Essay. In the earlier version, Ricardo had maintained that “[t]he rate of profits … must depend on the proportion of production to the consumption necessary to such production [i.e., wages]” (VI, 108), where these two magnitudes were seen as two quantities of corn (hence the “material ratio”). In the later stage, the same principle is established by means of the labour theory of value—i.e., by the hypothesis that commodity values are proportional to the labour (directly and indirectly) necessary for their production. Ricardo still maintains that the rate of profits is determined by the proportion between product and wages, but these two magnitudes are now no longer two quantities of corn, but are measured in value, by the amount of labour they embody. Their proportion only depends upon the commodity wage, and the conditions of production of wage goods.

The Principles, even more explicitly than the Essay, is devoted to establish the basic point that “profits depend on wages” (I, 143)—i.e., that “profits would be high or low in proportion as wages were low or high” (I, 111). This inverse relation between wages and profits could easily be lost sight of, when viewing wages, profits, and product, in price terms: the price movements caused by say a rise in wages, could generate the delusion that such a rise could be paid out of higher prices, rather than diminished profits. Even Adam Smith had made this mistake, and had accordingly maintained that the effect of a rise in wages would simply have been a rise in all prices. (Ricardo himself had, before the Essay on Profits, subscribed to this view, which he later referred to as Smith’s “original error respecting value”: VII, 100). The importance of the “corn-ratio” theory had been just that, by allowing Ricardo to bypass the problem of value when determining distribution, it made that mistake impossible. With the labour theory of value, Ricardo achieved something very similar to a measurement of product and wages in terms of corn. According to the labour theory of value, in fact, prices do not change when distribution changes (as they only depend upon the labour embodied in the commodities). Therefore, as is the case with the “corn-ratio” theory, no price movements could obscure the simple relationship between a rise of wages and a fall of profits. The only difference was that, as Sraffa writes,

it was now labour, instead of corn, that appeared on both sides of the account … the rate of profits was no longer determined by the ratio of the corn produced to the corn used up in production, but, instead, by the ratio of the total labour of the country [the value of the product] to the labour required to produce the necessaries for that labour [the value of wages] (I, xxxii).

To better understand Ricardo’s position, it is important to remember that, as Marx noticed, “in his observations on profits and wages, Ricardo … treats the matter as though the entire capital were laid out directly in wages” (Marx, 1862–3, II, 373). This does not mean that Ricardo is not aware that non-wage capital was used in production: he even inserted a chapter “On Machinery” in the third edition of the Principles. But he often reasons as if only wage capital were employed in production (a misconception originating in Smith). This implies that the amount of labour embodied in the wage rate is not only equal to its value, but is also equal to the proportion of the total labour necessary to reproduce the wages, and to the proportion of wages in the value of the product: if w is the amount of labour embodied in the wage rate, and L is the number of workers employed in producing the social product, the proportion of the total labour used to reproduce the wages is wL/L, which, for the labour theory of value, is also the proportion of the value of wages in the value of the product. This explains why Ricardo sometimes writes that the rate of profits depends upon the amount of labour embodied in the wage rate (e.g. VIII, 130), sometimes that it depends upon “the proportion of the annual labour of the country devoted to the support of the labourers’ (I, 49), sometimes that it depends on the proportion of the value of wages in the product (I, 125). The three statements are in fact equivalent.

Ricardo’s proposition on the inverse wage-profit relation has been regarded as a “truism” by a number of authors, ranging from Malthus (1820, p. 310) to Schumpeter (1954, p. 592) or Robbins (1952, p. 84). Now, it is a truism that, if something is divided in two shares, as one of them increases, the other must decrease. Thus it is obvious that, if wages and profits make up the value of the whole product, the shares of profits and wages must vary inversely with one another. Ricardo’s interest was in the relation between the rates. But consider that, if one disregards non-wage capital, the ratio of the share of profits to the share of wages is equal to the rate of profits:  (profits/product) : (wages/product) = (profits/wages). This must of course fall with a rise in the share of wages. But the share, as we have just seen, is equal to the (labour value of the) rate of wages. The proposition that there is an inverse relation between the rates of wages and profits can therefore be “translated” into the truism that there is an inverse relation between the shares of wages and profits. But this is only a way of proving that proposition, and of course does not render it a truism.


Ricardo’s interest in the theory of distribution, as has already been mentioned, arose with the problem of the determination of the rate of profits, and in a sense it was always on the rate of profits that he focused. But in Ricardo’s conception profits are “the leaving of wages”—according to a famous “formula” by the Ricardian de Quincey (1844, p. 257). To work out “the Principles of Profit,” he has therefore to deal with “the Principles of Wages,” with which they are so closely connected.

In the Essay on Profits, Ricardo deals only briefly with the theory of wages. He already has the two main points of the theory he will later develop in the Principles: that the rate of wages depends upon the proportion between capital and population, and that it will tend to be equal to “that remuneration for labour, which is necessary to the actual subsistence of the labourer” (IV, 22). Thus he assumes the rate of wages to be constant, by means of the assumption that “capital and population advance in the proper proportion” (IV, 12), but he does not really dwell on his conception—which, as Taussig (1896, p. 174n.) remarks, “was an idea of Malthus’s” (its main constituents, however, can be traced to the chapter on wages of the Wealth of Nations).

Chapter V of the Principles (“On Wages”) starts with the distinction, which Ricardo makes for labour as for all commodities, between the “natural price” and the “market price.” In Ricardo’s definition,

The natural price of labour is that price which is necessary to enable the labourers, one with another, to subsist and perpetuate their race, with increase or diminution … The market price of labour is the price which is really paid for it, from the natural operation of the proportion of the supply to the demand … However much the market price of labour may deviate from its natural price, it has, like commodities, a tendency to conform to it (I, 93–4).

The conception of the mechanism through which wages would be brought to their natural level is of course based on Malthus’s population theory: any time wages were above the natural (subsistence) level, because the pace of capital accumulation has exceeded that of population, the latter would increase, and therefore cause wages to go down again. Conversely in the case where population had taken the lead over capital accumulation.

Ricardo remarks that

it is not to be understood that the natural price of labour, estimated even in food and necessaries, is absolutely fixed and constant. It varies at different times in the same country, and very materially differs in different countries. It essentially depends on the habits and customs of the people (I, 97–7).

This point derives from Torrens’s Essay on the External Corn Trade (which Ricardo had not known before writing the Essay on Profits). Ricardo explicitly avows Torrens’s influence; he quotes a passage from his essay, on the importance of the “habits of living” of the workers for the determination of natural wages, and adds: “The whole of this subject is most ably illustrated by Colonel Torrens” (I, 97n.).

Notwithstanding the fact that Ricardo acknowledges the influence of social elements in the determination of the level of the workers’ subsistence, his theory of the natural wage in the last analysis relies on a mechanical supply-demand equilibrium. Unlike the market-price natural-price mechanism for other commodities, in the case of labour the explanation of the reason why that particular level (subsistence) is stated to be the naturallevel of its price, appears to be one and the same thing with the mechanism which would have to bring the price to that level.

The value of labour for Ricardo is … determined by the means of subsistence which, in a given society, are traditionally necessary for the maintenance and reproduction of labourers. But why? By what law is the value of labour determined in this way? Ricardo has in fact no answer, other than the law of supply and demand reduces the average price of labour to the means of subsistence that are (physically or socially necessary in a given society) for the maintenance of the labourer. He determines value here, in one of the basic propositions of the whole system, by demand and supply—as Say notes with malicious pleasure (Marx, 1862–3, II, p. 400).

Ricardo has no notion that wages are kept at the “natural” (subsistence) level by the historically determined imbalance in the forces of capital and labour (a point Smith for instance had very clearly made: 1789, I, pp. 68–70). In Marx’s words, Ricardo does not have the notion of capital as “a definite social relationship.” He therefore in the end relies on supply and demand, inconsistently with his general position that “natural price … has nothing to do with demand and supply” (VIII, 207) (hence the “malicious pleasure” of a supply and demand theorist like Say).

In addition to this, Ricardo’s supply and demand mechanism was itself seriously defective, as again Marx notices:

Before, in consequence of the rise of wages, any positive increase of the population really fit for work could occur, the time would have passed again and again, during which the industrial campaign must have been carried through, the battle fought and won … What did the farmers do now [after the 1848–59 increases in agricultural wages in Britain]? Did they wait until, in consequence of this brilliant remuneration, the agricultural labourers had so increased and multiplied that their wages must fall again, as prescribed by the dogmatic economic brain? They introduced more machinery, and in a moment the labourers were redundant again in a proportion satisfactory even to the farmers (Marx, 1867, pp. 597–8).

The difficulty due to the long time that would be necessary for changes in population to affect the market price of labour, is after all recognized by Ricardo himself, who admits that “notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite period, be constantly above it” (I, 94–5). But he had not realized the danger which this admission represented, given the importance that the habits of the workers had in his conception of the natural level of the wages: a “market” rate of wage which for “an indefinite period of time” is above the “natural” level would in all probability change this “natural” level. Thus it would be the natural level to adjust to the market level, rather than the other way round.

It is however worth noting that Ricardo’s supply and demand mechanism is in any case entirely different from a marginalist[2] one. Suffice here to say that Ricardo’s mechanism works through changes in population—i.e., through changes in the endowment of labour—whereas the marginalist one works through changes along a supply curve of labour, derived from a given endowment of this “factor of production” (as well as of the others).


Although in conventional accounts of the history of economic doctrine, the theory of the rent is generally associated with Ricardo’s name, Ricardo himself tells us in the Essay on Profits:

In all that I have said concerning the origin and progress of rent, I have briefly repeated, and endeavoured to elucidate the principles which Mr. Malthus has so ably laid down, on the same subject, in his “Inquiry into the Nature and Progress of Rent” (IV, 15n).

Sraffa writes: “When in February 1815 Malthus’s pamphlets [Inquiry and Grounds of an Opinion] appeared, Ricardo was able to write within a few days his Essay … , by using his already developed theory of profits, incorporating Malthus’s theory of rent” (IV, 4). Indeed, “the letters of Ricardo up to the time of the publication of Malthus’s Inquiry into Rent contain no discussion of the subject of rent … he had been working out his theory of profits without ever finding it necessary explicitly to mention rent” (IV, 7). Ricardo’s interest in the theory of rent is, even more than in the case of wages, subordinated to his interest in the theory of profits. What he wants is simply to “get rid” of rent, as he writes: “By getting rid of rent, … the distribution between the capitalist and the labourer becomes a much more simple consideration” (VIII, 194).

The theory of rent which Ricardo actually adopts from Malthus (its real paternity however is often ascribed to Anderson, or to West; on this, see Cannan, 1917, pp. 216ff.) is based on the idea that as there are lands of different fertility, they are successively brought into cultivation, stating from those of which the degree of fertility is highest (Ricardo regards the order of fertility of different lands as given; but see Sraffa, 1960, ch. 11). Even if all the land is of the same degree of fertility, there will be lands which are worse, because they are farther from the market place, etc. On these lands, to produce the same amount of corn more capital is necessary—either for the actual production, or to bring the product to the market, etc. The idea is also to be found in Ricardo, that successive portions of capital expended on the same land could yield proportionately less (see e.g. IV, 14; I, 17). Given a uniform rate of wages, the rate of profits on lands of a worse quality must necessarily be less than the rate of profits obtainable on lands of the first quality. The competition of farmers to obtain these lands will allow their owners to ask and get a rent for their use. Rent will settle at a level such as to leave farmers with the same rate of profits, no matter what kind of land they hire. It is only at this point that the convenience for them of bidding higher prices for the use of better lands will cease. (Rent therefore derives from the diminishing returns: “If there had been no limits to fertility, if one capital after another had been equally productive, of produce, no rent could have been generated”: II, 211).

Let us suppose, as Ricardo does in the Essay (IV, 17), that to produce three hundred quarters of corn on lands of the first quality, an outlay of two hundred quarters of corn is necessary. If these lands are sufficient to produce all the corn that is required, no landowner could get a rent for the use of it, and the whole of the surplus produce (one hundred quarters out of every three hundreds produced) would go to profits. The rate of profits will be 50 per cent. But if it was necessary also to grow corn on lands of a worse quality, where to obtain three hundred quarters, two hundreds and ten are necessary, the rate of profits will be, on the latter lands, only 43 per cent approximately. A rent will therefore arise on the better lands, which will be equal to fourteen quarters out of every three hundreds produced; only eighty-six quarters will be left for profits. At this point competition between farmers to hire the better lands will stop: their rate of profits will be 43 per cent, whether they employ lands of the first quality, paying fourteen quarters as rent (out of every three hundreds produced), or they employ the worse land, paying no rent.

If lands of a third quality start to be used, the rate of profits will go further down, a rent will arise also on the intermediate lands, and that on the best lands will accordingly rise. And so on.

Since, according to this conception, on the worst kind of land used in production there will be no rent, Ricardo could, by concentrating on this no-rent land, study “the distribution between capitalist and labourer” in total separation from rent. The product of the worst land is in fact only divided between wages and profits.

In the Essay, Ricardo explicitly assumes that “no improvements take place in agriculture” (IV, 12). From this it follows that

by bringing successively land of a worse quality, or less favourably situated into cultivation, rent would rise on the land previously cultivated, and precisely in the same degree profits would fall; and if the smallness of profits do not check accumulation, there are hardly any limits to the rise of rent, and the fall of profit (IV, 14).

Hence the conception that there is a tendency to “a stationary state,” where profits [are] so low that accumulation ceases altogether. Also in the Principles Ricardo maintains that “the natural tendency of profits … is to fall” (I, 120). Here, however, he also writes that “this tendency, this gravitation as it were of profits, is happily checked at repeated intervals by … improvements” in agricultural techniques of production (ibid.), and repeatedly affirms that England is “yet far distant” from the stationary state.

The theory of rent in the Principles does not materially differ from that of the Essay. The only important new point which Ricardo makes is of course related to the labour theory of value, and it is that the value of the agricultural produce is regulated by the quantity of labour necessary to produce it on the worst land used in its production—i.e., on the no-rent land. The value of the product obtained on better lands is therefore higher than the quantity of labour actually employed in its production, and on each kind of land this difference is of course equal to the value of the rent paid for it. Hence Ricardo’s conception (famous for Marshall’s misleading attempt to reconcile it with marginalist theory) that “rent is not a component part of the price of commodities,” and that accordingly it cannot be the cause of the high price of corn, but is rather its effect (I, 77–8; the last point however is already to be found in Smith: 1789, I, p. 147).

A General Rule of Value and Its Exceptions

The adoption of the labour theory of value, i.e., of the principle that commodity prices are regulated by the quantity of labour directly and indirectly necessary to produce them, marks Ricardo’s passage from the Essay on Profits to the Principles, as already mentioned. Of course, this theory was not an invention of Ricardo: it is often traced as far back as Thomas Aquinas. Ricardo’s main point of reference was Adam Smith, who had confined the validity of the principle that commodities exchange in proportion to the labour necessary to produce them, to “that early and rude state of society which precedes both the accumulation of stock and the appropriation of land” (1789, I, p. 49). Ricardo writes that Smith speaks

as if, when profits and rent were to be paid, they would have some influence on the relative value of commodities, independent of the mere quantity of labour that was necessary to their production. Adam Smith, however, has nowhere analysed the effects of the accumulation of capital, and the appropriation of land, on relative value. It is of importance, therefore, to determine how far the effects which are avowedly produced on the exchangeable value of commodities, by the comparative quantity of labour bestowed on their production, are modified or altered by the accumulation of capital or the payment of rent (I, 23n.).

Here we have a clue to the whole position of Ricardo, on value. He claims that the “general rule” of commodity value is that it is proportional to the quantity of labour embodied (the “main ingredient” of value), but that there are “exceptions” (or “modifications”) to this rule (see e.g. VIII, 193).

The chapter “On Value” of the Principles, after starting with the statement (in the heading of Section I) that “The value of a commodity …depends on the relative quantity of labour which is necessary for its production” (I, 11), goes on to state (in the heading of Section IV): “The principle that the quantity of labour bestowed on the production of commodities regulates their exchangeable value, [is] considerably modified by the employment of machinery and other fixed and durable capital (I, 30)—something which, as Cannan (1929, p. 176) remarks, appears to “flatly contradict” the opening statement.

The “modifications” to the “general rule” of value are basically due to the fact that profits have different weights in the prices of different commodities. Let us write the (natural) price of commodity A, using Ricardo’s device of reducing to labour its means of production (on this, see Sraffa, 1960, ch. VI). Let L1A be the amount of labour used in the direct production of AL2A the amount of labour used in the direct production of the means of production of A, and so on; let r be the rate of profits, and w the (money) rate of wages; the (money) price of A will be:

pA = w L1A (1 + r) + wL2A (1 + r)2 + … + wLNA (1 + r)N + ….

Analogously, the (money) price of a commodity B will be:

pB = w L1B (1 + r) + wL2B (1 + r)2 + … + wLNB (1 + r)N + ….

It is only if the ratios LiA / LiB are equal for all is that pA / pB will be independent of r, and equal to those ratios, and therefore to the ratio of the total labours embodied in A and B (Σi LiA / Σi LiB). In this case, any change in the rate of profits would cause the same proportional change in the price of A and of B (and therefore no change in their ratio): profits would in fact be the same proportion of pA as of pB. It is only in this case that Ricardo’s “general rule” of value strictly holds. Otherwise, any change in distribution would cause a change in the relative price of the commodities (the relative price being equal to the ratio of embodied labours for r = 0). Ricardo accordingly concedes:

my proposition that with few exceptions the quantity of labour employed on commodities determines the rate at which they will exchange for each other … is not rigidly true, but I say that it is the nearest approximation to the truth, as a rule for measuring relative value, of any I have ever heard (VIII, 279).

According to him, “in the relative variation of commodities, any other cause, but that of the quantity of labour required for production, [is] comparatively of very slight effect” (II, 59). The other cause, of course, is a variation of distribution: given the amount of labour embodied, “relative values may vary solely because the value of labour rises or falls” (i.e. the rate of profits falls or rises). Although not attaching much importance to this other cause, he writes, “I cannot wholly shut my eyes to it” (IX, 178).

That commodities change in relative value when distribution changes, or that commodities which embody the same quantity of labour do not exchange one to one, are two different aspects of the same problem. Ricardo however generally looks at this problem from the point of view of the change in relative prices caused by changes in distribution (as it is the case in the passages just quoted). This is due to the fact that the problem of value does not interest Ricardo for its own sake, but essentially in connection with the theory of distribution, and, more specifically, with the problem of showing the inverse wage-profit relation. The “modifications” to the labour theory of value are a disturbing element for Ricardo in so far as they imply that the value of the product to be distributed between profits and wages, changes when nothing but distribution changes. The simple picture made possible by the labour theory of value (or, for that matter, by a “corn-ratio” theory), of a division between profits and wages of a product the size of which does not change when the size of the slices changes, is obfuscated by the “modifications” to that theory, which endanger Ricardo’s conclusion that if one slice is bigger, the other must be smaller.

When dealing with distribution, Ricardo reasons as if the labour theory of value admitted no qualifications at all. The whole chapter “On Profits,” for instance, is built upon the assumption that the value of the product to be shared between profits and wages is given. This was noticed by Malthus, who wrote that

[Ricardo’s] theory of profits depends entirely upon the circumstance of the mass of commodities remaining at the same price, … whatever may be the variations in the price of labour. This uniformity in the value of wages and profits taken together is indeed assumed by Mr. Ricardo in all his calculations … But if it be not true, the whole theory falls to the ground (1820, p. 326)

—and this was of course the case, according to Malthus.

The difficulty was a serious one for Ricardo, and he struggled with it until the very last days of his life. About a month before his death, he wrote to McCulloch: “I cannot get over the difficulty of the wine which is kept in a cellar for 3 or 4 years, or that of the oak tree, which perhaps had not 2/- [pence] expended on it in the way of labour, and yet comes to be worth ₤100” (IX, 330–1). However, throughout he adheres to the view that the modifications to the labour theory of value are of a trifling importance. (This is of course linked with his inconsistencies in the treatment of non-wage capital: if only wage capital, i.e., direct labour, is employed in production, there are no “modifications” to the exchange according to labour embodied, assuming yearly production cycles for all commodities.)

Ricardo attempts to solve the problem of the modifications to the labour theory of value by means of an “invariable measure of value,” or a measure of the “absolute value,” to which he devoted the very last of his writings.

There are two distinct though related problems which Ricardo groups under that of the search for an “invariable measure of value.” The first is that of finding an invariable yardstick with which to measure the value of the commodities. When two commodities vary in relative value, it would be possible, by comparing them with such an invariable standard, to know which of them has really varied in value. This problem is not particularly Ricardian: it is for instance already to be found in Smith (Lauderdale had as early as 1802 condemned this search for an invariable measure as a search for the “philosopher’s stone”: Lauderdale, 1804, p. 23). The question of an invariable yardstick was also present in Ricardo’s writings on money during the suspension of cash payments, in connection with the problem of proving that the rise in the paper price of gold and the other commodities was due to depreciation of paper, not to a rise in the value of commodities. In these writings, Ricardo appears consistently to deny that an invariable standard could be found.

With the inception of the labour theory of value in Ricardo’s thought, the question of finding an invariable yardstick seems nearer to a solution: if commodities exchange in proportion to labour embodied, a commodity produced with an unvarying quantity of labour would be an invariable yardstick. But it is at this point that the second (and more typically Ricardian) aspect of the search for an invariable measure of value comes out. Indeed, Ricardo admits that a commodity produced by an unvarying quantity of labour “still … would not be a perfect standard or invariable measure of value, because … it would be subject to relative variations from a rise or fall of wages” (I, 44). Accordingly, the search for an invariable standard becomes that of a commodity invariable also in the latter respect, i.e., invariable with changes in distribution. Prices measured in terms of such a commodity would only reflect the main “cause of value” (labour embodied), and would not depend upon the level of wages and profits. Ricardo apparently does not realize that if the prices of two commodities expressed in terms of a third, are not to one another as the labours embodied in them, to express these prices in terms of yet another standard cannot change their ratio, and render it equal to the ratio of embodied labours. Indeed, to change the standard simply means to divide the numerator and the denominator of the price ratio by the same number (the price of the new standard in terms of the previous one).

Ricardo’s attempt to cancel the “exceptions” to the labour theory of value by means of an invariable measure, was an “attempt … to square the circle” (Marx, 1862–3, I, p. 150). Marx was right in saying that the reason why Ricardo put himself on this “blind alley” was that he basically saw the problem of the “modifications” to the labour theory of value from the point of view of the changes to the value of commodities caused by changes in the level of wages, rather than from that of differences in the values of commodities produced by the same amount of labour (Marx, 1862–3, III, p. 71). Indeed, if one looks at it from the latter point, it is clear that not measure of value whatsoever can solve it. Contrary to what Ricardo tried hard to show, commodities which embody the same amount of labour will not in general exchange one to one: as Malthus put it, “[Ricardo’s] rule may be considered as the exception, and the exceptions the rule” (1827, p. 27).

Foreign Trade and International Gold Movements

It has already been mentioned that as early as the 1813–15 debates on the Corn Laws, Ricardo came out as a strong supporter of free trade, and that his first published work which did not deal with money, the 1815 Essay, denounced the Inexpediency of Restrictions on Importation in its very (full) title (see above). It was however only in the 1817 edition of his Principles that Ricardo backed his position with a general theory of international trade, embodying the principle of comparative costs—which can perhaps be described as the most widely accepted of the “truths” of political economy. (Marshall said of it: “That doctrine … established by Ricardo … I do not know that any person has shaken it in the least; in fact, I do not myself believe that it has ever been seriously attacked by anyone who has taken the trouble to understand it”: 1887, p. 65.)

The chapter “On Foreign Trade” is the last of the seven chapters which constitute the Principles of Political Economy proper (see above). Ricardo argues first that foreign trade does not augment the value of the goods which the country has, because the value of the goods received is equal to that of the goods given in exchange for them (I, 128). Also, foreign trade by itself does not raise the rate of profits. It can only raise it if, by rendering wage goods cheaper, it diminishes the value of the (given) commodity wage—or, what is the same for Ricardo (see above), if it diminishes the proportion of wages in the value of the product. It would be the reduction of wages made possible by foreign trade, and not foreign trade itself, which would raise profits: “the rate of profits can never be increased but by a fall in wages, and … there can be no permanent fall of wages but in consequence of a fall of the necessaries on which wages are expended” (I, 132).

The effect of foreign trade is according to Ricardo to augment the riches of the trading countries. This he illustrates with a celebrated example (I, 135), which we shall reproduce, slightly changed. Let us suppose that the conditions of production of “cloth” and “wine” are the following: to produce one unit of cloth requires 50 labourers in England, and 25 in Portugal; to produce one unit of wine requires 200 labourers in England and 25 in Portugal. This country [Portugal] has therefore an (absolute) advantage in producing both goods. (This means that the English capitalists would get a higher rate of profits if English capital and labour were removed to Portugal, provided wages were not higher there: I, 136.) However, Portugal’s advantage is greater in the production of wine, for which Portugal would require 25/200 of the labour required in England, than in that of cloth, where she would require 25/50. (Notice that in this conception the advantage only derives from differences in the technical conditions of production in the two countries.) If Portugal took say twenty-five workers from the production of cloth, and employed them in the production of wine, she would produce one unit of wine more, and one unit of cloth less. If at the same time England took one hundred workers from the production of wine, and employed them in that of cloth, she would obtain two units of cloth more, and half [a] unit of wine less. As a whole, the amounts of commodities produced by the two countries would be augmented: there would be one unit of cloth and half [a] unit of wine more than without any specialization. The greater the specialization the greater the gains. How they will be divided between the two countries depends upon the price at which the two products will be exchanged between them: if wine and cloth exchanged one to one, the whole advantage would be reaped by England; if one unit of wine exchanged for four units of cloth, the whole advantage would go to Portugal (the two limits are of course the labour values of the two commodities in the two countries). Any intermediate price would divide the benefits between the two countries (for each unit of labour embodied in the exported commodity, each unit of labour embodied in the exported commodity, each country would receive an amount of the other commodity which would require more than one unit of labour to be produced at home).

According to Ricardo, “the same rule which regulates the value of commodities in one country, does not regulate the relative value of the commodities exchanged between two or more countries” (I, 133, italics added). The cloth given by England would not necessarily exchange for the amount of wine produced in Portugal with the same amount of labour: “The labour of 100 Englishmen cannot be given for that of 80 Englishmen, but the produce of the labour of 100 Englishmen may be given for the produce of the labour of 80 Portuguese” (I, 135; the reason for this is that within the same country, the same rates of wages and of profits must obtain, while this is not the case among different countries). Ricardo however does not apparently have a general rule for the determination of international prices.

The fact that it would be convenient for the two countries to specialize in consequence of a difference in the comparative costs of producing the two commodities, does not by itself ensure that the specialization will actually take place in the two (decentralized) economies: the price level of say England may be too high (in terms of bullion, which is “the general medium of circulation”), and no cloth could therefore be sold to Portugal. English people will of course still be buying Portuguese wine. The exchanges will therefore turn against England. If this is not sufficient to stop the English purchases of wine (i.e. if Portuguese wine is cheap enough) the gold export point will be reached, and the English purchases of wine will be settled with gold. The loss of gold to Portugal will tend to lower the price level of England (relative prices remaining the same), and to raise that of Portugal, and will not cease until the point is reached that it is convenient for the Portuguese to buy English cloth. So the precious metals “are, by the competition of commerce, distributed in such proportions amongst the different countries of the world, as to accommodate themselves to the natural traffic which would take place if no such metals existed, and the trade between countries were purely a trade of barter” (I, 137).

A change in the conditions of production might happen, so as actually to invert the comparative advantages. Let us suppose that it is the technique for producing wine in England which improves, and its price consequently falls lower than that at which Portuguese wine is obtainable there. The importation of wine would of course cease. The price of English cloth would be the same as before, Portugal would be buying cloth by means of bullion (according to the mechanism outlined in the preceding paragraph for England), and would thereby be raising the price level in England, and lowering her own. A new equilibrium will be reached, with England having a higher price level, and stock of gold, than before the improvement took place. Ricardo lays down the following principle: “the improvement of a manufacture in any country … tends to increase the quantity of commodities, at the same time that it raises general prices in the country where the improvement takes place” (I, 141).

From the foregoing discussion it very clearly appears that in the Principles, when Ricardo had already adopted the labour theory of value, and rejected his earlier conception of value as also determined by scarcity, he was still using the quantity theory of money, applying it to the precious metals (not simply to paper money), and by no means restricting it to temporary phenomena. There is no attempt, in his analysis of the specie flow mechanism and its effects on the levels of prices in the different countries, to reconcile it with the other notion, on which he lays much stress in the chapter “On Currency and Banks” (and elsewhere), namely, that “Gold and silver, like all other commodities, are valuable only in proportion to the quantity of labour necessary to produce them” (I, 352; notice the difference with the statement in The High Price of Bullion, quoted above).

The contradiction between a quantity and a labour (or a cost of production) theory of the value of money is obvious, and has often been discussed, as for instance by Marx, who deals with it in his critique of Ricardo’s monetary theory in A Contribution to the Critique of Political Economy (Marx however overlooks the presence in the Ricardo of the early 1810s of a scarcity conception of value). As Marx writes, “if the value of gold is given [by the labour embodied in it], the amount of money in circulation is determined by the prices of commodities” (1859, p. 171), and not the other way round. An abundance or scarcity of gold could only have temporary effects on its value, and would be made good by variations in its production—just as in the case of the movement of the market price of any commodity towards the natural price. But we have seen in the preceding examples that in Ricardo’s theory of international gold movements, the cost of production of gold does not play any role—and in fact permanent changes of prices in terms of gold were taking place, totally unrelated to changes in the quantity of labour necessary to produce it.

There is no explicit attempt at reconciling the two conflicting views in Ricardo. In the chapter “Taxes on Gold,” however, he argues that gold, being money, has the peculiarity that there constantly is a stock of it in the economy, which would normally be large, with respect to its current production. This means that the market price of gold would only very slowly adapt to its natural price—as in the case of labour, the market price of which can, according to Ricardo, be different from its natural price “for an indefinite period” (as we have seen above, in the section on wages). This makes the link between cost of production and value much weaker for gold than for ordinary commodities.

Another reason why in the international specie flow mechanism the link with the cost of production of gold might have been obfuscated in Ricardo’s mind, is the fact that he sees things from an English angle, and always tends to regard gold as an imported commodity. Therefore, at least within the country, the value of gold would not directly be dependent on its cost of production. But this of course does not mean that the value of gold is free to move in accordance only with changes in its quantity, without any reference to its cost in the producing country.

It is also to be remembered that the contradiction is only to be found in the Principles, and not in Ricardo’s earlier works on monetary theory, where he does not yet have a labour theory of value (this is the case also for Economical and Secure Currency). But in the Principles Ricardo does not devote much attention to monetary theory as such. Actually, in the first two editions the chapter “On Currency and Banks” opened with the following sentence: “It is not my intention to detain the reader by any long dissertation on the subject of money. So much has already been written on currency, that … none but the prejudiced are ignorant of its true principles” (I, 352 and n.). And after 1817 monetary theory was not again much in Ricardo’s mind. When he devoted his attention to money, it was basically to concrete monetary problems, as in his 1819 Parliamentary evidence, or his posthumously published Plan for the Establishment of a National Bank. (On the contradiction between the quantity and the labour theory of the value of money in Ricardo, see also St. Clair, 1957, ch. 15.)

Taxation and Public Debt

Besides international trade, the incidence of taxation is the main set of problems to which Ricardo applies the theory of value and distribution developed in the first chapters of the Principles. Although his treatment of taxation is generally regarded (together with that of Smith) as the foundation stone of the modern approach, there is truth in the remark that the part on taxation is “the most defective portion of his book” (Patten, 1893, p. 156). Ricardo scatters his discussion in many (rather badly arranged) chapters, dealing with different kinds of taxes, and his exposition is very uneven, in some cases going deeply to trace the ultimate consequences of a tax, sometimes instead stopping at a rather initial stage. Moreover, Ricardo seldom gets at general principles, his results often depending for instance upon which assumptions are made on the spending behaviour of the people on whom the tax falls.

From the point of view of equity, Ricardo maintains that taxes ought to be equally divided among all the classes of society other than the working class. The main reason for this exclusion is that, on the basis of his subsistence theory of wages, Ricardo thinks that a direct tax on wages would cause a rise in nominal wages to the same amount (so as to leave real wages unaffected). The tax would not be borne by the workers, but by the capitalists, and would therefore be an unequal tax (if capitalists are already taxed qua capitalists). The same would happen if, instead of directly taxing wages, the government should lay a tax on a wage-good. Like every tax on produce, it would act as an increase of its cost of production, and therefore of its price. This would in turn cause a rise of money wages, so as to leave the commodity wage at the subsistence level (the only difference between a tax on wage goods and a direct tax on wages, would according to Ricardo be that “the former will necessarily be accompanied by a rise in the price of necessaries, but the latter will not”; I, 215). For that part however in which the wage good was consumed by other classes, a tax on it “might affect the consumers” generally, and to this extent would not be unequal (I, 159).

An important distinction which Ricardo draws at the very start of the first chapter on taxes, is of course that between taxes which fall upon income and taxes which fall upon capital (I, 151). He makes the general point that the ultimate incidence of taxation may be different from the apparent one: “Taxes are not necessarily taxes on capital, because they are laid on capital; nor on income, because they are laid on income” (I, 152). To investigate whether a tax actually falls on income or on capital is of course of the utmost importance, because according to Ricardo taxes on capital “must proportionably diminish that fund by whose extent the extent of the productive industry of the country must always be regulated.” He claims that “there are no taxes which have not a tendency to lessen the power to accumulate,” but allows that this is not the case if a tax falls on the revenue of people who are thereby induced to save its amount from their unproductive consumption (I, 152).

In general, Ricardo appears to regard public expenditure as unproductive, and he accordingly adopts “the golden maxim of M. Say, ‘that the very best of all plans of finance is to spend little, and the best of all taxes is that which is the least in amount’” (I, 242). He also considers the question of the effects of expenditure for public works (in 1817 and 1818 the government decided to spend substantial amounts in relief works: see Smart, 1910, I, p. 543 and pp. 611–12). According to Ricardo, even when public expenditure is not for unproductive consumption, it cannot do any good: “the raising of funds for the purpose of employing the poor … diverts those funds from other employments which would be equally if not more productive to the community.” This capital “cannot fail” to employ men somewhere else, and “every interference is prejudicial” (VII, 116; see also IV, 356).

Ricardo had to reconcile his views with the undeniable fact that in 1817, “notwithstanding the immense expenditure of the English government” during the years of war, “the national capital … has been greatly increased, and the annual revenue of the people, even after the payment of their taxes, is probably greater … than at any other former period” (I, 151). This of course was not easy, especially after the forceful pamphlet in favour of government expenditure published in 1823 by Ricardo’s friend William Blake—a pamphlet which engaged Ricardo’s attention very much (see IV, 323ff.).

Blake had argued that, if public expenditure is simply “a diversion of capital from a productive to an unproductive employment,” the war could have only impoverished Britain, and left an enormous amount of people without “any possibility of finding employment” for lack of what Ricardo usually calls “the funds for the maintenance of labour” (Blake, 1823, pp. 51–3). Blake had touched a crucial point:

It appears to me that the error lies in supposing, first, that the whole capital of the country is fully occupied; and, secondly, that there is immediate employment for successive accumulations of capital as it accrues from saving. I believe there are at all times some portions of capital … lying wholly dormant

and therefore government expenditure can represent an addition to demand, “without encroaching upon the existing capital” (pp. 54–5).

Ricardo allows that “the only theory by which the actual phenomena of the last 25 years [i.e. the Napoleonic wars] can be explained,” is that “simultaneously with the expenditure of Government” an amount of savings (from unproductive consumption) countervailing it accumulated (IV, 341; see also 339). And he apparently thinks that is what must have taken place. (He does not see, however, that his “theory” is still unable to explain the great increase in wealth recorded at the end of a war which had been accompanied by a huge increase of public expenditure and debt). His reaction to Blake’s point about full employment of capital is that, even though there might be idle capital, “these dormant portions never find their way into the hands of Government,” because “they consist of goods for which there is no market” (IV, 340).

While Ricardo de facto assumes full employment of capital, he nowhere appears to think in terms of full employment of labour. As a matter of fact, in the chapter “On Machinery” (added in the third edition of the Principles) he accepts the idea that machinery could well create unemployment; he candidly declares (much to McCulloch’s scandal) to have changed his mind on this question, and to think now that the introduction of machinery may reduce the gross produce of the country (though increasing the net produce), in which case it “will be injurious to the labouring classes, as some of their number will be thrown out of employment, and population will become redundant” (I, 390).

With respect to the policy of providing for public expenditure, the best course for Ricardo would be that of raising annually through taxes an amount equal to the annual expenditure. This, even in the event of an exceptional expenditure, like that due to a war (IV, 186). No debt had to be incurred, and, as mentioned above, in 1819 he put forward a plan to repay the whole national debt in four or five years. (He wrote that he had “the firm conviction that nations will at last adopt the plan of defraying their expenses, ordinary and extraordinary, at the time they are incurred”: IV, 190.) According to him, in fact, if a tax was laid on each individual of a nation so that the whole debt (and not only the interest on it) would be repaid, people might save this whole amount from their income. If instead the tax was only to raise the amount necessary for the payment of the interest on the debt, people would only save this lesser amount: “the system of borrowing … tends to make us less thrifty—to blind us from our real situation” (I, 247).

It is to be mentioned that Ricardo subscribes to Melon’s view that “the debts of a nation are debts due from the right hand to the left” (I, 244n.), and writes that the amount which is raised annually through taxes to pay the interest charges for the debt “is merely transferred from those who pay it to those who receive it … The real expense is the twenty millions [the amount of the debt], and not the interest which must be paid for it. Whether the interest be or be not paid, the country will neither be richer nor poorer” (I, 244). “With a view to wealth only, it might be equally desirable” that a debtor (be it the nation or an individual) should or should not pay his debt. But Ricardo or course thinks that “Justice and good faith demand that the interest of the national debt should continue to be paid, and that those who have advanced their capitals for the general benefit, should not be required to forego their equitable claims, on the plea of expediency” (I, 246).

Ricardo and After

J.H. Hollander, the famous Ricardo scholar, wrote in 1910 that there was “an impressive unanimity” among economists, as to the great influence that, for good or evil, Ricardo has had on economic thought (Hollander, 1910, pp. 115–16). Today, there is not much reason to think otherwise.

Ricardo has had first of all a great influence in establishing that body of notions which form the groundwork of “sound” economic policies. Say’s Law, the quantity theory of money, and his [Ricardo’s] theory of foreign trade, combined in Ricardo’s hands to form a powerful machinery by which to get at clear-cut policy proposals. Although many recoiled from the extremes to which he would often push his arguments, only few were able successfully to contrast them. It is to this set of notions that Keynes must have been referring, when he wrote the famous sentence, that “Ricardo conquered England as completely as the Holy Inquisition conquered Spain” (Keynes, 1936, p. 32). Indeed, it is sufficient only to mention a few of Ricardo’s maxims, to realize how much they have contributed to shape the economists’ mind: “demand is only limited by production,” “to save is to spend,” “the raising of funds for the purpose of employing the poor … diverts those funds from other employments,” “money cannot call forth goods,” “That which is wise in an individual, is wise also in a nation,” “Under a system of perfectly free commerce, each country devotes its capital and labour to such employments as are most beneficial to each”; and so on.

On these points, marginalists arrived much at the same conclusions as Ricardo. The paths through which they got at them were however generally different from those of Ricardo. Consider Say’s Law. In Ricardo, the point that there cannot be an insufficiency of aggregate demand does not come so much from his theory, as from a de facto identification of saving and investment decisions. The same result is instead obtained by marginalists through an elaborate theoretical argument, involving the construction of “well behaved” demand functions for each good and “productive factor,” including capital (of which saving and investment are of course the flow aspect).

 In the case of comparative advantage theory, the difference is even greater, in that it is not the case (as one could argue it was with Say’s Law) that marginalists simply provided Ricardo’s conclusions with a theoretical basis which they otherwise lacked. Indeed, with comparative advantage there is the substitution of one theoretical construction for another. In marginalist theory, the trading countries are generally assumed to have the same technology, and the advantages of specialization derive from differences in the relative scarcities, and therefore in the prices, of the productive factors. Ricardo’s argument instead assumes differences in the technologies of the trading countries, and the advantages of specialization derive from differences in the relative quantities of labour necessary to produce the commodities in the different countries. Therefore his argument, which is based on the labour theory of value, has nothing to do with the scarcities—or with the prices—of labour, land, or capital. A change in the rates of wages or profits would not touch the comparative advantage at all.

The point which did not really require much change, to fit into the scarcity approach of marginalism, was the quantity theory of money. But this theory, as we have seen above, was rather a misfit in Ricardo’s system, and its consistency with the rest of it problematic.

It is also to be remembered that Ricardo was claimed by Marshall as a brilliant—if somewhat crude—forerunner of marginalist (or, according to this view, “neo-classical”) theory. Marshall, starting from the point that “we must interpret him generously” (1920, p. 671), tried to divest Ricardo of the two points in his theory which basically conflicted with marginalism: the rate of wages given by the worker’s subsistence, and the labour theory of value. The latter he reduced to the idea that value depends upon cost of production. As to the former, Marshall maintained that Ricardo had never seen wages as “fixed,” relying for this on passages where Ricardo had argued that the level of wages differs in different places and at different times. Indeed, given the rate of wages and productive techniques (and assuming no rent), the rate of profits would be wholly determined, and therefore the cost of production and the price of the product. No role would be left to play for the marginalist mechanism of supply and demand: the proportions in which goods are demanded become irrelevant to the determination of value and distribution, and there would not be any mechanism to bring the supply and demand of factors to equality.

Marshall claimed he could make a synthesis of Ricardo’s cost of production and Jevons’s utility: “The cost of production principle” and the “final utility” principle are undoubtedly component parts of the one all-ruling law of supply and demand; each may be compared to one blade of a pair of scissors” (1920, p. 675). On these grounds, he maintained that “the foundations of the theory as they were left by Ricardo remain intact; … much has been added to them, and … very much has been built upon them, but … little has been taken from them” (1920, p. 417). Notwithstanding the flimsy evidence on which the claim was based (see Ashley, 1891), “so dominating was Marshall’s authority that in Britain at any rate he was able to establish his view as the orthodox one” (Hutchison, 1952, p. 422).

The foregoing points can illustrate the links between Ricardo and mainstream economic thought. Ricardo is however with more foundation to be considered as a crucial influence on another important—if unorthodox—current of thought: that which passing through Marx gets at the modern revival of classical political economy, now generally associated with the name of Piero Sraffa, and often labeled with the slightly misleading name of “Neo-Ricardianism.”

The importance of Ricardo’s (and, more generally, classical) theory for Marx is such that Marx is often regarded as the last of the classical economists. Indeed, as M.H. Dobb wrote, Marx’s

criticism of Political Economy … retains certain essential limbs of the classical structure, as representing important constituents of truth, at the same as it emphasizes additional relationships which have the effect of remodeling the structure and revolutionizing the practical significance alike of the whole and of its several elements (1940, p. 36).

The main element of the Ricardo-Marx connection is of course the labour theory of value. Ricardo had grouped the difficulties which this theory encountered under the heading “exceptions” to the general rule of value, and had attempted to solve them by means of a measure of “absolute value.” To these problems was devoted Marx’s “transformation of values into prices of production,” and again to them is devoted Sraffa’s 1960 book, with its solution to the problem of building a coherent wage-profit-price relationship.

Sraffa had the additional task of re-discovering classical political economy as a theoretical structure different from (and alternative to) marginalism, thus rescuing Ricardo from Marshall’s interpretation. This Sraffa has done first of all in his edition of Ricardo’s works (to which an important companion are the first three chapters of Dobb’s Political Economy and Capitalism). Another important step towards this reappraisal of Ricardo (and classical) theory is of course Sraffa’s own book, with its solution to the difficulties which Ricardo and Marx had left unsolved in their theories of value and distribution. In providing this solution, Sraffa has also proved the impossibility of measuring the “quantity of capital” as a single magnitude, independent of distribution. Thus, ironically, while solving the difficulties of classical theory, he has also proved the untenability of (among others) the theory which had been put forward by Böhm-Bawerk, the great marginalist critic of Marx, with his “average period of production.” (On the Sraffa-based critique of orthodox capital theory, see Symposium, 1966.)

Sraffa’s work has in two ways enhanced the importance of Ricardo’s theory for a modern reader. On the one hand, because it has shown that this is a theory in its own right, different from marginalism (not simply a crude and incomplete version of it), and that it could be freed from the difficulties which had at least in part been the cause of its early demise. On the other hand, its forceful attack on the fundamentals of the received doctrine has shown that economics is far from being in a state of finality, and that it makes sense to work for an alternative to conventional wisdom.

Selected Works

All references to Ricardo are to The Works and Correspondence of David Ricardo, edited by Piero Sraffa, with the collaboration of M.H. Dobb, Vols I–XI, Cambridge: Cambridge University Press, 1951–73; they are quoted with a Roman numeral for the volume, and an Arabic or a small Roman numeral, for the page.


Ashley, W.J. 1891. The rehabilitation of Ricardo. Economic Journal 1, September, 474–89.

Bagehot, W. 1888. Ricardo. In Economic Studies, as reprinted in The Collected Works of Walter Bagehot, ed. N. St. John-Stevas, Vol. XI, London: The Economist, 1978.

Blake, W. 1823. Observations on the Effects Produced by the Expenditure of Government During the Restriction of Cash Payments. London: Murray.

Cannan, E. 1917. A History of the Theories of Production and Distribution in English Political Economy from 1776 to 1848. 3rd edn, London: King.

Cannan, E. 1929. A Review of Economic Theory. London: King.

De Quincey, T. 1844. The Logic of Political Economy. As reprinted in The Collected Writings of Thomas de Quincey, ed. D. Masson, Vol. IX, Edinburgh: Black, 1890.

Dobb, M. 1940. Political Economy and CapitalismSome Essays in Economic Tradition. 2nd edn, London: Routledge & Kegan Paul, 1980.

Fetter, F.W. 1965. Economic controversies in the British Review, 1802–1850, Economica 32, November, 424–37.

Hawtrey, R.G. 1930. Currency and Credit. 3rd edn, London: Longmans, Green & Co.

Hollander, J.H. 1910. David RicardoA Centenary Estimate. Reprinted, New York: Kelley, 1968.

Horner, L. 1853. Memoirs and Correspondence of Francis Horner, M.P., edited by His Brother. 2nd edn, 2 vols, Boston: Little, Brown.

Huskisson, W. 1810. The Question Concerning the Depreciation of Our Currency Stated and Examined. As reprinted in A Select Collection of Scarce and Valuable Tracts and Other Publications, on Paper Currency and Banking, ed. J.R. McCulloch, privately printed, London, 1857.

Hutchison, T.W. 1952. Some questions about Ricardo. Economica 19, November, 415–32.

Keynes, J.M. 1925. The Gold Standard. The Nation and Athenaeum, 2 May. As reprinted in The Collected Writings of John Maynard Keynes, Vol. XIX, ed. D. Moggridge, London: Macmillan and Cambridge University Press, 1981.

Keynes, J.M. 1936. The General Theory of Employment, Interest and Money. London: Macmillan.

Lauderdale, L. 1804. An Inquiry into the Nature and Origin of Public Wealth, and into the Means and Causes of Its Increase. Reprinted, New York: Kelley, 1966.

Malthus, T.R. 1811. Depreciation of paper currency. Edinburgh Review 17, February, 340–72.

Malthus, T.R. 1820. Principles of Political Economy Considered with a View to Their Practical Application. London: Murray.

Malthus, T.R. 1827. Definitions in Political Economy, Preceded by an Inquiry into the Rules Which Ought to Guide Political Economists in the Definition and Use of Their Terms; with Remarks on the Deviation from These Rules in Their Writings. Reprinted, New York: Kelley, 1971.

Marshall, A. 1887. Evidence before the Gold and Silver Commission. As reprinted in Official Papers by Alfred Marshall, ed. J.M Keynes, London: Macmillan, 1926.

Marshall, A. 1890. Principles of Economics. London: Macmillan.

Marshall, A. 1920. Principles of Economics. 8th edn, London: Macmillan, 1959.

Marx, K. 1859. A Contribution to the Critique of Political Economy. Moscow: Progress Publishers, 1970.

Marx, K. 1862–3. Theories of Surplus Value, Vols I–III. London: Lawrence & Wishart, 1969–72.

Marx, K. 1867. Capital. A Critique of Political Economy, Vol. I. London: Lawrence & Wishart, 1977.

Mill, J.S. 1844. Essays on Some Unsettled Questions of Political Economy. Reprinted, London: London School of Economics and Political Science, 1948.

Patten, S.N. 1893. The interpretation of Ricardo. Quarterly Journal of Economics, April. As reprinted in S.N. Patten, Essays in Economic Theory, reprinted, Port Washington and London: Kennikat Press, 1971.

Robbins, L. 1952. The Theory of Economic Policy in English Classical Political Economy. London: Macmillan.

Schumpeter, J.A. 1954. History of Economic Analysis. London: Allen & Unwin.

Smart, W. 1910. Economic Annals of the Nineteenth Century: 1801–1820. 2 vols, reprinted, New York: Kelley, 1964.

Smith, A. 1789. An Inquiry into the Nature and Causes of the Wealth of Nations, 5th edn, 2 vols, ed. E. Cannan, London: Methuen, 1922.

Sraffa, P. 1960. Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory. Cambridge: Cambridge University Press.

St. Clair, O. 1957. A Key to Ricardo. London: Routledge & Kegan Paul.

Stigler, G.J. 1953. Sraffa’s Ricardo. American Economic Review 43, September. As reprinted in G.J. Stigler, Essays in the History of Economics, Chicago: University of Chicago Press, 1965.

Symposium. 1966. Paradoxes in capital theory: a symposium. With contributions by L.L. Pasinetti, P.A. Samuelson, D. Levhari, M. Morishima, M. Bruno, E. Burmeister, E. Sheshinski, P. Garegnani. Quarterly Journal of Economics 80(4), November, 503–83.

Taussig, F.W. 1896. Wages and CapitalAn Examination of the Wages Fund Doctrine. Reprinted, New York: Kelley, 1968.

Thornton, H. 1802. An Enquiry into the Nature and Effect of the Paper Credit of Great Britain. Ed. F.A. von Hayek, London: Allen & Unwin, 1939. Reprinted, New York: Kelley, 1978.

Viner, J. 1937. Studies in the Theory of International Trade. Reprinted, Clifton: Kelley, 1975.


1  “Supply creates its own demand”; hence there can be no overproduction or underproduction.

2  The method of analysis developed by Léon Walras and W.S. Jevons that is at the core of modern (neoclassical) economic theory.]