David Ricardo & the Comarative and Absolute Advantage

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David Ricardo was one of those rare people who achieved both tremendous success and lasting fame. After his family disinherited him for marrying outside his Jewish faith, Ricardo made a fortune as a stockbroker and loan broker. When he died, his estate was worth more than $100 million in today’s dollars. At age twenty-seven, after reading Adam Smith’s The Wealth of Nations, Ricardo got excited about economics. He wrote his first economics article at age thirty-seven and then spent the following fourteen years—his last ones—as a professional economist. Ricardo first gained notice among economists over the “bullion controversy.” In 1809 he wrote that England’s inflation was the result of the Bank of England’s propensity to issue excess banknotes. In short, Ricardo was an early believer in the quantity theory of money, or what is known today as monetarism. In his Essay on the Influence of a Low Price of Corn on the Profits of Stock (1815), Ricardo articulated what came to be known as the law of diminishing marginal returns. One of the most famous laws of economics, it holds that as more and more resources are combined in production with a fixed resource—for example, as more labor and machinery are used on a fixed amount of land—the additions to output will diminish. Ricardo also opposed the protectionist Corn Laws, which restricted imports of wheat. In arguing for free trade, Ricardo formulated the idea of comparative costs, today called comparative advantage—a very subtle idea that is the main basis for most economists’ belief in free trade today. The idea is this: a country that trades for products it can get at lower cost from another country is better off than if it had made the products at home. Say, for example, Poorland can produce one bottle of wine with five hours of labor and one loaf of bread with ten hours. Richland’s workers, on the other hand, are more productive. They produce a...
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