* CHAPTER 4 *

The Classical School:

Thomas Robert Malthus and David Ricardo

Wn ITH ADAM SMITH we are at the beginning of the stage in the

history of economic thought that is commonly referred to as the
classical period. Many of the leading economists of this period
who took Adam Smith's work as their point of departure show
a high degree of similarity both in their analytical approach and
in their views on economic policy, and this group of economic
thinkers is known as the classical school. Sometimes one refers
to the English classical school, but since many of its prominent
members were Scottish, "British" would perhaps be a more suit¬
able term. During the hundred years from the 1770s to the 1870s
there were obviously a number of important economists outside
Britain, and some of them could naturally be seen as belonging
to the classical school; a prominent example is the French econo¬
mist Jean-Baptiste Say (1767-1832). But there were also econo¬
mists, especially in Germany and France, who did significant
work somewhat apart from the classical tradition, and we will
return to some of these in chapter 7. In the present and the fol¬
lowing chapter we concentrate on a few of the greatest names of
the classical school.
While Adam Smith is the first of the leading classical econo¬
mists, it has been common to see John Stuart Mill as the last. In
most expositions of the history of ideas the death of Mill in 1873
marks the transition to a new dominant school of thought the—
neoclassical. The term classical has accordingly a fairly precise
content, at least in terms of chronology. However, it should be
kept in mind that John Maynard Keynes, in the preface to his
General Theory of Employment , Interest , and Money (1936), wrote
that he would refer to all economists who did not share his own
view of the causes of unemployment as "classical." This inter¬
pretation was taken up by many of Keynes's followers, but in the
present context the meaning of the term is the standard one in
the history of economic thought and not that of Keynes.

60
 THE CLASSICAL SCHOOL

To what extent is it meaningful to talk about these economists

as a "school"? Taking a broad view of the period, they constitute
a fairly large but rather heterogeneous group of people. Some
of them were members of parliament, some were employed in
public administration, while a third group earned their living in
the private sector. Their interest in economic questions was for
most of them something that they cultivated during their leisure
—
time which for a number of them was rather extensive. Few of
them had any connection with academic life. For those of them
who were based in London or its vicinity, their common meet¬
ing place was the Political Economy Club, founded in 1821. At
its monthly gatherings one of the members talked on a topic of
current theoretical or practical interest, and this was followed by
a general debate. Even if the members of the school identified
themselves in a broad sense with Adam Smith's approach to the
subject, they were not dogmatic, and they had a number of top¬
ics and issues that they could discuss and sometimes disagree
about.1 But one of the reasons that we think of them as a specific
scientific school is that they very consciously related their work
to each other: Ricardo took his point of departure from Smith,
while Mill built on Ricardo's formulations. The later members
of the school, especially John Stuart Mill, also emphasized their
dependence on the work of their predecessors and were rather
reluctant to accept that their own thinking represented a break
with the past. However, it is important to realize that the con¬
cept of the classical school and indeed of other schools of eco¬
nomic thought is an invention of later historians of the subject,
being one of many concepts that they use to impose order and
structure on a complex past. We will come back to this issue in
the discussion of the neoclassical school and the breakthrough of
"marginalist" thinking in chapters 8 and 9.
Thomas Robert Malthus and David Ricardo are two of the
greatest names in the classical school, and they were the domi¬
nating characters in the community of economists at the be-

1
Prominent members of the dub induded James Mill (1773-1836), Robert
Torrens (1780-1864), and Nassau Senior (1790-1864). James Mill (the father of
John Stuart Mill) was at his time best known for his work in philosophy and
history. Torrens wrote on monetary questions and international trade, while Se
¬

nior was among other things an early critic of Malthus's theory of population.

61
 CHAPTER 4

ginning of the nineteenth century. They shared many of Adam

Smith's views concerning the social benefits of a system of free
markets and also agreed with each other on many basic issues in
economic theory and policy. But as we shall see, there were also
areas where their opinions differed sharply.

THOMAS MALTHUS

Thomas Robert Malthus (1766-1834) grew up as the son of a law¬

yer and country gentleman with strong intellectual interests. The
younger Malthus studied science and mathematics in Oxford
while at the same time acquiring a broad knowledge of literature
and history. After completion of his studies he became a fellow
of Jesus College in Oxford, and he was also ordained as a priest
in the Anglican Church. His positions both at the college and in
the church provided him with a reasonable income and only a
modest workload, so that he had good opportunities to pursue
his intellectual interests. In 1805 he was appointed professor of
history, politics, commerce, and finance at the East India College,
a new institution that had been founded to train employees for
the East India Company, the trading monopoly that governed
India during a large part of the time of the English colonial rule.
Malthus can therefore be said to have been the first professor of
political economy or economics in England,2 although not at a
proper university. As professor, his duties were similar to those
of his colleagues at the present time; he was expected to teach,
carry out administrative tasks, and do research. And like his suc¬
cessors he thought that it was difficult to find the time to carry
out all his tasks. In his correspondence we find several letters

2 In comparison
it may be mentioned that the first professor of economics in
the Nordic countries was Anders Berch, who was appointed juris prudentiae,
oeconomiae et commerdorum professor at Uppsala University in 1741; see Lied-
man and Persson (1993). In Norway, Christen Smith became professor of bot ¬

any and economic sciences at the University of Christiania (now Oslo) in 1814.
The combination of botany and economics may seem strange from a modem
perspective, but at that time it was not uncommon in some countries to see the
exploration of a country's natural resources as a central concern of economics,
and from that point of view the combination of subjects might have seemed
more natural.

62
 THE CLASSICAL SCHOOL

where he complains that teaching and administration take up

too much of his time; the result is that he is behind with his cor¬
respondence and has problems meeting the various deadlines set
for him by editors and publishers.

The Theory of Population

Malthus is above all known for his theory of population growth,
which was first presented in his book An Essay on the Principle
of Population (1798). Few books written by an economist have
received so much attention and had so much influence. It was
an important source of inspiration for Charles Darwin's theory
of evolution, and it left its mark on the thinking of several gen ¬

erations regarding the population problem and related issues,

particularly poverty and birth control. It came out in six edi ¬

tions during Malthus's lifetime. The most substantial revision

occurred with the publication of the second edition, which in
many respects must be considered a new book. In the literature
on Malthus the first edition is therefore often referred to as the
First Essay, while the second and later editions are known as
the Second Essay. In the various editions of the Second Essay the
book increased steadily in volume, mainly because of increased
emphasis on providing factual evidence for the theory. Malthus
attempted to strengthen its empirical foundations through re¬
ports from his extensive travels in a number of European coun ¬

tries, the Scandinavian countries among them. He collected

data and general observations on population questions; the ba ¬

sic theory, however, remained the same through all editions of

the book.
The full title of Malthus's book was An Essay on the Principle
of Population as it affects the future Improvement of Society, with Re¬
marks on the Speculations of Mr. Godwin, M . Condorcet , and other
Writers. The Marquis de Condorcet (see chapter 2) had published
a book with a broad perspective on the development of man¬
kind and a utopian vision of the future. The English writer Wil¬
liam Godwin's book Enquiry concerning Political Justice (1793)
belonged to the same utopian tradition. He claimed that in the
human society of the future, war and crime would cease to exist,
and therefore there would be no need for law enforcement. Dis¬
ease, anguish, melancholy, and resentment would vanish, and
63
 CHAPTER 4

each person would strive to promote the common good. Malthus

and his father had long discussions about these visions of the
future. The older Malthus was enthusiastic about the books and
their optimistic forecasts. But the son was unable to share his
father 's optimism, and in his own book he set himself the task of
rejecting tire reasoning on which it was based. His main idea was
that the tension between the growth of population and the pro¬
duction of food would set strict limits to how far human progress
could be carried.
The first edition of Malthus' Essay begins with two basic pos¬
tulates, which in a pointed and dramatic manner convey to the
reader that he is about to read a book that is concerned with the
very foundations of human existence:3
I think I may fairly make two postulata. First, That food is neces ¬

sary to the existence of man. Secondly, That the passion between

sexes is necessary and will remain nearly in its present state. (Mal¬
thus 1798; 1970, p. 70)
It is easy to agree with the first postulate: man cannot live with¬
out food. The second may require a further comment. One of
Godwin's hypotheses was that the sexual instinct "the pas — ¬

—
sion between the sexes," as Malthus says would decline with
.
increasing wealth Malthus did not share Godwin's belief at this
point, but we may note that he gives a small concession to God¬
win's view by his use of the word nearly.
On the next page of the book, the core of Malthus's theory of
population is presented in compact form as follows:
Population, when unchecked, increases in a geometrical ratio. Sub ¬

sistence increases only in an arithmetical ratio. A slight acquain ¬

tance with numbers will show the immensity of the first power in
comparison to the second. (Malthus 1798; 1970, p. 71)
So, according to Malthus, a population which is not faced with
any constraints on the availability of resources will have a ten¬
dency to grow as a geometric series of the form
1, 2, 4, 8, 16, ...

3
All quotations and page references are taken from the edition of the First
Essay that was published in the Pelican Classics series in 1970.

64
 THE CLASSICAL SCHOOL

and the justification for this is the second postulate of the con¬
stancy of the passion between the sexes. The theoretical foun¬
dation for the assumption of geometric growth can therefore be
derived from biology. Malthus also provides an empirical justifi¬
cation of the hypothesis by citing the development in the United
States, where, according to him, there was an abundance of food,
and where in fact it had turned out that population had doubled
every twenty-five years. We saw in chapter 3 that Adam Smith
made a similar observation about the development in the Ameri¬
can colonies (which, during the time between the publication of
The Wealth of Nations and Malthus's First Essay, had become the
United States of America).
When the production of food only grows as an arithmetic se¬
ries, that is, in the form of
1/ 2, 3, 4, 5, . . .
the interpretation must be that the distance in time between each
element of the series is the same as in the population series. If
both tendencies could develop independently of each other, we
would observe a steady fall in the amount of food production per
capita. But the very essence of Malthus's theory of population is
that such an independent development of population and food
production is impossible.
The population hypothesis is based on a clearly formulated
(although stylized) biological assumption. By contrast, the the ¬

oretical justification for the arithmetic series describing food

production is less evident; nor is it easy to derive it from em¬
pirical generalizations. But Malthus's intention regarding the
special hypothesis of the arithmetic series is clearly to put it up
as a pointed contrast to the geometric progress of the popula¬
tion, once we interpret the distance in time between the terms
as being the same for the two series. The numbers 1, 2, 3, 4, 5, ...
must therefore be considered as describing the development of
production over time with a growing population. The example
accordingly implies that the relative increase of food production
is less then the (potential) relative increase of population. In a
more modem formulation the food production hypothesis may
be interpreted as an assumption that there are decreasing returns
to scale in agriculture. This interpretation is supported by a state¬
ment in the Second Essay: "It must be evident to those who have

65
 CHAPTER 4

the slightest acquaintance with agricultural subjects that, in pro¬

portion as cultivation extended, the additions that could yearly
be made to the former average produce must be gradually and
regularly diminishing" (Malthus 1803; 1992, p. 18). This formu 4 ¬

lation comes close to the one that we find in Turgot (1766), and
which was discussed in chapter 2.
Malthus also argues that historical experience indicates that
the arithmetic series represents an upper limit of what one may
envisage for the increase of food production in England in inter ¬

vals of twenty-five years. Some historians of thought have criti ¬

cized Malthus for failing to provide a deeper theoretical justifica ¬

tion for the arithmetic series and argued that it would have been
better if he had used the more general assumption of decreasing
returns in agriculture. Quite clearly, they have a point. On the
other hand, there can be no doubt that the dramatic juxtaposi ¬

tion of the two series is an important explanation of the general

acceptance and popular appeal of his theory.
The core of Malthus's theory is accordingly that there exists a
permanent tension between the availability of food and the size
of the population. The natural growth rate of population must
necessarily be kept down to that of the lower rate of growth of
food supply:
By that law of our nature which makes food necessary to the life of
man, the effects of these two unequal powers must be kept equal.
This implies a strong and constantly operating check on popu¬
lation from the difficulty of subsistence . This difficulty must fall
somewhere; and must necessarily be severely felt by a large por¬
tion of mankind. (Malthus 1798; 1970, p. 71)
There must be mechanisms that hold down the rate of popula¬
tion growth so as to keep it aligned with the development of food
supply.5 These were positive and preventive checks, which Mal¬
thus also divided into "misery and vice." Famine was the most
obvious example of misery while birth control, according to Mal-

4
The quotation from the Second Essay has been taken from the edition pub¬
lished by Cambridge University Press in 1992.
5
This basic idea can also be traced back to the Wealth of Nations: "Every spe
¬

cies of animals naturally multiplies in proportion to the means of their subsis ¬

tence, and no species can ever multiply beyond it" (Smith 1776; 1976, p. 97).

66
 THE CLASSICAL SCHOOL

thus's theological convictions, was the primary example of sin:

In the long run, per capita food supply would be constant. The
mechanisms that would ensure this were on the one hand de ¬

creasing returns in agriculture (the arithmetic series) and on the

other hand an infinitely elastic supply of labor at the subsistence
wage. The subsistence wage was defined, following the lines of
thought of Cantillon and Smith, as the level of income that was
just sufficient for the reproduction of the working class. Malthus
did not deny that wages, for a number of reasons, could lie above
the subsistence level for limited periods of time, but he believed
that higher family incomes would increase the number of chil ¬

dren and thereby the size of the population and the workforce.
The increased supply of labor would then put downward pres ¬

sure on wages, which would move back toward the subsistence

level. This "iron law of wages," as it was called, was part of the
explanation why the critics of economics sometimes referred to
it as "the dismal science."6
Malthus's ideas about the forces determining population,
wages, and the standard of living had a strong influence on the
whole of the classical school and led many of its members to take
a pessimistic view of the possibility of improving the situation
for the poor of society. However, both Malthus and other econo¬
mists came later on to modify the theory that he presented in

6 It was the historian Thomas Carlyle (1795-1881) who first used the expres¬
sion "the dismal science" to characterize economics, but it is interesting to note
that he used it in a completely different connection. The expression appeared
for the first time in an article that Carlyle published in 1849 on "the negro ques¬
tion." There his main point was that economists did not realize that society
could not function without strong leadership. The economists' idea that the
market mechanism could direct the use of resources to promote the common
good was in Carlyle's opinion based on a total misunderstanding of human na¬
ture. The strong must necessarily lead the weak, among other things by forcing
them to work more than they desired. The specific example that he used was
the white plantation owners in the West Indies in relation to the black popula¬
tion there, but he also believed that his arguments were of more general valid¬
ity. Thus, according to Carlyle, the worst form of contemporary slavery was
not that of the American South, but the slavery of the strong under the weak
which resulted from democracy and the market economy. It was the econo¬
mists' recommendations of this type of society that made their subject deserve
the epithet "the dismal science." For a further discussion of Carlyle's views see
Persky (1990).

67
 CHAPTER 4

the first edition of his Essay. The definition of subsistence wages

gradually underwent a change, so that it was conceived more as
a social and psychological minimum rather than a purely physi¬
ological one. Higher wages could make people used to a higher
standard of living, and this adjustment could prevent the wage
from falling back to its previous subsistence level. Malthus also
found that there were other checks on population than misery
and vice. In the second and later editions of Essay on Population
—
he introduced self -control "moral restraint"— as a further cause
of reduced population growth. He pointed out that the growth
of population could be checked through late marriages, and he
found that this hypothesis was confirmed by observations that
he made in particular during his travels in Norway.
Seen against the background of Godwin's utopian vision of
the good society that humanity could establish on the basis of
scientific insight and political determination, Malthus's message
was widely viewed as deeply pessimistic. Man was doomed to
live in a permanent tension between population growth and
food production, and in this perspective there was limited scope
for economic and social reform. When regarded as a broad vi ¬

sion of society, the theory appeared to be strongly conservative.

However, Malthus himself was probably not as conservative as
he was commonly regarded in public opinion. He considered his
descriptive analysis of the central problems of society also as a
guideline to constructive reforms, which in his view had to be
designed with a view to limiting population growth.

Economic Policy: Poverty, Free Trade, and Unemployment

A controversial aspect of Malthus's writings was his analysis of
poor relief, which was derived from his theory of population and
focused on the connection between income and the number of
child births. A form of poor relief that led to an increase of the
incomes of the poor would in his view primarily result in an in¬
crease in the number of children. Over time, this would increase
the supply of labor and lead to lower wages, so that the result of
higher incomes for the poor would not increase their standard of
living; the standard would be the same, but there would be more
people living in poverty. The best form of assistance to the poor,
according to Malthus, was a social and economic policy that

68
 THE CLASSICAL SCHOOL

stimulated people to have fewer children. The existing form of

poor relief in England was therefore misguided and ought to be
dismantled. His stand on this question furthered strengthened
his reputation as a conservative thinker with policy recommen¬
dations that were seen as going against the interests of the poor.
Another area where Malthus's participation in the public de¬
bate created considerable controversy was the debate about free
trade. The free trade issue arose particularly in connection with
the so-called Com Laws, which were a central theme in the eco¬
nomic policy debates in England in the early nineteenth century.
The purpose of the Com Laws was to protect British agriculture
by allowing for prohibition on imports when the price of wheat
fell below a certain level. The consequence was naturally that
this level became a minimum price of wheat, which ensured the
profitability of the existing domestic wheat production. Malthus
was against the abolishment of the Com Laws. He realized that
this went against the principle of free trade that was supported
by Ricardo and other economists, but he argued that no principle
of economic policy could claim to be universally valid, and that
exceptions must be allowed under particular circumstances. In
this case, his view was that the Com Laws could be justified by
the concern for national security, for it was important that Brit
¬

ain was self -sufficient with com in the case of war. The question
was also an important one from the point of view of distributive
justice, for the high price of com was a particularly heavy bur¬
den on the poor. Malthus's position in this controversy further
increased his reputation as a spokesman for the landowners' in ¬

terests and an enemy of the working classes. He protested keenly

against this interpretation of his views, and in the fifth edition
of his Essay on Population he emphasized that his primary goal
as regarded economic policy was to "improve the condition and
increase the happiness of the lower classes of society" (Malthus
1803; 1992, p. 386.)
Malthus was not only an expert on population. He was also
a general economist with broad interests, and his other main
work was Principles of Political Economy Considered with a View to
their Practical Application (1820). Although the book was firmly
rooted in the classical tradition, in a number of areas Malthus
adopted views that deviated from the ideas of the other classical
economists. His best-known case of heterodoxy was his belief

69
 CHAPTER 4

that aggregate demand could become too low to secure full em¬
ployment. This was a viewpoint which led his good friend Da¬
vid Ricardo to conclude that Malthus had failed to understand
the most fundamental principles of economics. Many years later,
—
however, it led John Maynard Keynes in chapter 23 of his Gen¬
—
eral Theory (1936) to hail him as an important precursor of his
own ideas. Malthus's theory was based on his assumption about
population and wages; wages would tend toward the minimum
subsistence level. However, the workers would produce far more
that could be absorbed by their own demand, and there would
accordingly be a latent trend toward overproduction. In other
words, the aggregate demand in society would tend to be too
low to absorb the aggregate supply, and a natural consequence
of this would be unemployment. In Malthus's view, there would
therefore be a need for a class of people who demanded the ex¬
cess production without themselves making any contribution to
output. In England, this role could in his view be played by the
class of landowners, "the landed gentry." Ricardo was extremely
skeptical both to the idea of general overproduction and to the
role of landowners in the prevention of unemployment. In a let¬
ter to Malthus he wrote, "I can see no soundness in the reasons
you give for tire usefulness of demand, on the part of unproduc¬
tive consumers. How their consuming, without reproducing, can
be beneficial to a country, in any possible state of it, I confess I
cannot discover" (Ricardo 1951-55, Vol. VDI, p. 301). As Robert
Dorfman says in his article on the friendship between Malthus
and Ricardo, one can almost see Ricardo shaking his head as he
writes these words.

The Friendship with David Ricardo

The contact between the two economists was established in 1811,
when Malthus wrote to Ricardo on a question concerning the
causes of inflation; Malthus wished to meet Ricardo for an "ami¬
cable discussion in private," so as not to waste time on a long
controversy in print. This became the beginning of their corre ¬

spondence and a friendship which lasted until Ricardo's death in

1823. According to Dorfman (1989) they often met several times
a week and they wrote about eighty letters to each other each
way. They disagreed about a large number of issues, and they
70
 THE CLASSICAL SCHOOL

became steadily better friends. We get a good impression of the

relationship between them from the last letter that Ricardo wrote
to Malthus two weeks before his death. After a long discus¬
sion of a problem in the theory of value that they had disagreed
about, he concludes: "And now, my dear Malthus, I have done.
Like other disputants, after much discussion we each retain our
own opinions. These discussions, however, never influence our
friendship; I could not like you more than I do if you agreed in
opinion with me" (Ricardo 1951-55, Vol. DC, p. 382).
The story of the friendship between Malthus and Ricardo is
a moving one. It is also of interest from the point of view of the
history of economic ideas, since it demonstrates that the clas¬
sical school of economists did not only consist of people who
thought alike about economic questions. They had a common
approach to economics that enabled them to communicate eas¬
ily with each other, and this approach was based on a shared
theoretical framework. But this framework was not so narrow
that it necessarily made them draw the same conclusions. After
Ricardo's death Malthus reflected that if they had only had the
opportunity to continue their discussions, they would in the end
have reached agreement. In his speech at Ricardo's funeral he
said: "I never loved anybody out of my own family so much.
Our interchange of opinions was so unreserved, and the object
after which we were both enquiring was so entirely the truth and
nothing else, that I cannot but think we sooner or later must have
agreed" (Dorfman 1989, p. 162).

DAVID RICARDO

David Ricardo (1772-1823) came from a wealthy Jewish fam¬

ily. His father was a commodity and securities broker, and the
family had been business people for several generations, first in
Spain, later in Italy and the Netherlands before they settled in
England a few years before David was bom. His formal school¬
ing lasted only until he was fourteen, when he started to work
for his father's firm. Gradually, frictions developed between him
and his orthodox family, and the conflict became acute when he
married a non-Jewish woman. He left his father 's business and
established himself as a stockbroker. He was very successful and
71
 CHAPTER 4

quickly amassed a substantial fortune, which enabled him to re ¬

tire when he was about forty. He bought a country estate outside

London and lived on the income from his capital while devot ¬

ing much of his time to the study of politics and social affairs,
particularly economic issues. In 1819 he entered the House of
Commons, not as the result of an election campaign but through
the purchase of a seat in Ireland (where he never set foot). From
a modern-day perspective this suggests a form of political cor ¬

ruption, but at the time it was an accepted practice, which appar¬

ently did not hurt Ricardo's reputation.
The story is that Ricardo's interest in economics as a science
was aroused during a stay in the city of Bath, where Mrs. Ricardo
was taking the waters. He was looking around for something to
—
read and found The Wealth of Nations in a library probably one
of the more significant library loans in the history of the sub ¬

ject. Like many other members of the classical school, he was a

—
self -taught person in the area of economics, and in contrast to
—
people like Smith and Malthus he had not carried out academic
studies in any other field of knowledge.
Ricardo's career as a writer on economics began with the pub ¬

lication of the pamphlet The High Price of Bullion, a Proof of the

Depreciation of Bank Notes (1810).7 Its chief argument was that
the high price of gold was caused by a pronounced increase in
the circulation of bank notes, thereby establishing Ricardo as an
early spokesman for the quantity theory of money. This publi ¬

cation caused considerable attention and established Ricardo as

an authority on financial and monetary questions. Gradually, he
became one of the central participants in the Political Economy
Club, and several of its members, among them Malthus and
James Mill (the father of John Stuart Mill), strongly encouraged
him to write a general exposition of the whole area of economics,
or political economy. Ricardo was at first skeptical to the idea,
particularly because he felt that the cost of the effort of a sus¬
tained literary exposition would be too high. He probably over¬
estimated the cost, for he managed to complete his major work,
The Principles of Political Economy and Taxation, in less than two
years, and it was published in 1817. Later on he published little
of scientific significance, but when Malthus's Principles came

7 "Bullion" means unminted gold.

72
 THE CLASSICAL SCHOOL

out in 1820 Ricardo sat down to write a series of comments on it

that became so extensive as to correspond to the length of a
book. He did not, however, wish the manuscript to go into print,
and it was in fact not published until 1928 under the title of Notes
on Malthus.
Many writers have maintained that Ricardo's most impor ¬

tant contribution to the development of economics lies in his

establishment of a certain style of theoretical research that had
a strong influence on his successors. More than Adam Smith, Ri ¬

cardo reasons in terms of theoretical models. He makes simpli ¬

fying assumptions, he takes care to be precise about their exact

content, and he derives results from the models that are directed
both toward explaining the actual functioning of the economy
and laying the foundations for economic policy. The models are
not mathematically formulated, but the careful verbal formula ¬

tions and the illustrative numerical examples make the modem

reader feel that the mathematical formulations lie just below the
surface of the text. Not surprisingly, therefore, Ricardo's theories
have inspired a number of later theorists to try to formulate them
in mathematical language. The historical examples and practical
observations that are so characteristic of The Wealth of Nations,
play a very subordinate role in Ricardo's work.
There are also other ways in which The Principles of Political
Economy and Taxation is a totally different book from The Wealth of
Nations. Adam Smith's aim was to write a broad theoretical and
historical exposition of the whole field of economics. Ricardo's
book is both shorter and narrower in terms of scope. Rather than
aiming at a broad survey, he makes a selection of topics that par¬
ticularly interest him, and to a large extent the book takes the
form of comments on what he has read by other authors. He
quickly reviews topics on which he agrees with Smith, Malthus,
and others, then probes more deeply and carefully into the issues
where he sees himself as having something important to contrib ¬

ute to economic theory.

Ricardo's Principles can roughly be divided into three parts.
The first part discusses the foundations of the theories of price
formation and income distribution, the second part is concerned
with issues of taxation theory and policy, while the third part is
a collection of chapters on selected topics that are only loosely
interconnected.

73
 CHAPTER 4

Price and Distribution Theory: Labor and Capital

Chapter I of Ricardo's Principles begins with an italicized
paragraph:8
The value of a commodity, or the quantity of any other commodity for
which it will exchange, depends on the relative quantity of labour which
is necessary for its production, and not on the greater or less compensa
¬

tion which is paid for that labour. (Ricardo 1817; 1951, p. 11.)
Like Adam Smith before him, Ricardo thought of labor, capital,
and land as the three basic factors of production. But the quo
¬

tation suggests that his theory of relative prices took the form
of a clearly formulated labor theory of value similar to what
we find in Smith's work.9 As a matter of fact, Ricardo quotes the
beaver-deer example and says that it illustrates the foundation of
the theory of value. However, there is evidently a problem here
which Smith, in Ricardo's opinion, had not clarified in a satisfac¬
tory manner. How can there be three factors of production and
yet be the case that only the use of one of them explains rela¬
tive prices? The theory chapters of the Principles can be read as
an attempt to explain how these propositions fit together. The
analysis tries to make the labor theory of value more rigorous,
but in the course of his discussion Ricardo also arrives at a more
subtle understanding of it, introducing modifications that fore ¬

shadow theoretical developments that only became prominent

in the 1870s.
Ricardo first confronts the view that commodity production
needs more inputs of factors of production than just labor; there ¬

fore it cannot be the case that the use of labor alone determines
value. This view, he says, is based on a too simple understanding
of the theory. Let us extend the beaver-deer example by imagin-

8
All references are to Piero Sraffa's edition of the Principles , which was pub
¬

lished by Cambridge University Press in 1951.

9
However, the emphasis of the irrelevance of the wage rate for relative prices
raises a problem of interpretation. In the beaver-deer example the conclusion
follows if one assumes that beaver and deer hunters earn the same wage rate.
But in more complex settings with different types of workers who have differ ¬

ent wages, this assumption becomes unrealistic. We must therefore imagine

that what Ricardo has in mind is a stylized economy where labor as a factor of
production is homogeneous and is paid the same wage rate.

74
 THE CLASSICAL SCHOOL

ing that beaver and deer hunting require different kinds of weap¬
ons, and further that more labor is needed to produce a weapon
for the beaver hunt than for the deer hunt. It will still be the case
that the relative price of beaver and deer reflects the use of labor
in the two activities, but when assessing their labor contents it is
not enough to consider the time it takes to kill the animals. One
also has to consider the indirect time use that goes to construct
—
the weapons. The use of capital the weapons in this example —
can therefore be recalculated in terms of labor, so that the relative
labor contents of commodities also takes into account all indi¬
rect use via the input of capital goods. When it is extended along
these lines, the use of material factors of production does not cre¬
ate any problems for the labor theory of value; capital can be dis¬
solved into units of labor. In a modem economy characterized by
extensive specialization and division of labor, the more general
version of the theory becomes more difficult to confront with fac¬
tual observation compared to the impression that one gets from
Adam Smith's example. But it becomes more general, resting on
a more convincing theoretical foundation.
Ricardo also has another theoretical approach to the analysis
capital, which represents one of his most important theoretical
innovations. He points out that the process of production requires
different amounts of time in different industries. For a wine
grower the time between the beginning and end of the production
process may be several years, for the com farmer close to a year,

— —
for the baker less than a week. The capital which Ricardo mainly
thought of as prepaid wages will accordingly be tied up in the
production process for unequal lengths of time, and the interest
cost that this involves must be reflected in prices. If the direct
wage costs are the same in these industries, the implication is that
capital intensive goods become relatively more expensive than
would follow from the simple version of the theory. Ricardo ac¬
knowledges therefore that the labor theory of value does not hold
in its simple form, but he constructs some numerical examples
to indicate the magnitude of the differences that arise when one
takes account of the unequal length of the production processes.
In these examples it turns out that the deviations in relative prices
cannot exceed 6-7 percent. Ricardo uses these modest deviations
to argue that for analytical purposes it may be acceptable to use
—
the labor theory of value in its simple form even if it strictly

75
 CHAPTER 4

not hold
speaking is inaccurate. But we must conclude that he did
a pure labor theory of value, and the Americ an econom ist George
" % labour
Stigler (1958; 1965) has characterized his theory as a 93
theory of value" (100% minus the deviation of 6-7%.)
However, Ricardo does not drop his point about the time di
¬

, will
mension of production. In the pure labor theory of value it
—
be the case as indicated in the introductory paragraph that —
the level of wages plays no role for relative prices. Both for bea
¬

ver and deer hunting the price must be equal to labor hours times
the wage rate, but when we consider the relative price, given that
the wage rate is the same for the two activities, this will be equal
to the ratio of their respective labor requirements. But when the
length of the production processes differs, the commodity that
has the longest period of production must sell at a higher price
than that which would follow from the simple version of the
theory. Consequently, the conclusion that the level of wages is ir
¬

relevant for relative prices no longer holds. For an increase in the

wage rate will have the least effect on the price of the commodity
that has the longest period of production:
The relative prices of those commodities on which such durable
capital is employed, will vary inversely as wages; they will fall as
wages rise, and rise as wages fall. (Ricardo 1817; 1951, p. 43)
Ricardo emphasizes that this value or price theory is a theory
of relative prices. He also discusses the question of whether the
theory can say anything about absolute prices, or, as he formu
¬

lates it, whether there exists "an invariable measure of value."

His criterion for a constant measure of value is that there must
be a commodity whose labor content is constant, since such a
commodity would be ideal for expressing all other prices. But
such a commodity, he concludes, does not exist. Even in the case
of gold, technological changes occur that influence the cost of
production in terms of units of labor. On the other hand, it is
obviously convenient to be able to talk about rising and falling
prices without always having to specify exactly which price ra¬
tios one is referring to. The way by which Ricardo cuts through
this problem is characteristic of his theoretical style. Gold is not a
perfect measure of value, but we may still make the simplifying
assumption that it is: "Although I fully allow that money made
of gold is subject to most of the variations of other things, I shall
76
 THE CLASSICAL SCHOOL

suppose it to be invariable, and therefore all alterations in price

to be occasioned by some alteration in the value of the commod ¬

ity of which I may be speaking" (Ricardo 1817; 1951, p. 46).

The Theory of Rent

As we have seen, Ricardo "saved" the labor theory of value from
the complications raised by the use of capital. By dissolving capi¬
tal into labor units and using the 93 percent approximation, both
labor and capital could be incorporated in an extended labor
theory of value. But the role played by the third factor of produc¬
—
tion— land still needed to be clarified. It was in the analysis of
this factor that Ricardo made one of his most pathbreaking con¬
tributions in the form of his theory of rent. The theory is easiest
to understand if we assume that the person who owns the land
is different from the one who cultivates it. A farmer who rents
his farmland from a landowner will have to pay him a periodic
sum for the use of the land, and this is Ricardo's concept of rent.
Land varies in terms of its quality or productivity. As popula¬
tion and with it the consumption of food increases, farmers will
use land of decreasing quality. On the farm that uses the land of
the poorest quality, the cost of production (in terms of labor and
capital) will be exactly equal to sales revenue, and rent will be
zero. The farms that use land of higher quality will, on the other
hand, show a positive difference between revenue and cost, and
the difference will increase with the quality of the land. This is
the rent, for the difference shows the highest payment that the
landowner can collect without providing the farmer with an in¬
centive to move to a farm with a lower quality of land.10
How should the rent of land be incorporated in the labor theory
of price formation? Will not a higher rent and thereby a higher
cost also lead to a higher price? No, says Ricardo. Suppose that
the farmers who occupy the land of highest productivity succeed
in reducing their labor cost of production. This causes the rent to
increase. But the price does not increase, for this is determined
by the cost of production on the farm at the margin of cultivation,

10 The
theory of rent is discussed in detail in chapter II in the Principles. A short
chapter HI analyzes the rent from mines, but mostly by pointing out that the
same principles hold for the mining of minerals as for the production of food.

77
 CHAPTER 4
of com
where the rent is zero. Let us now assume that the price , for
(which Ricardo often uses as a synon ym for food ) goes up
popul ation . Farme rs
example, as a consequence of an increasing
will then start to use land of poorer quality, with the implic
ation
, the chain
that the rent on all other land increases. In other words
com to the rent of land, not
of causation goes from the price of
the other way round; rent is not an element of the cost of produc¬
tion. Ricardo summarizes the essence of the theory as follow s:
because
Com is not high because a rent is paid, but a rent is paid
com is high. (Ricardo 1817; 1951, p. 74)
an¬
In his exposition of the theory of rent Ricardo also arrived at
ent
other insight that marks significant progress from the treatm
the price of com must be
of Adam Smith. He pointed out that
determined by the cost of production on the farm with the high ¬

est cost, that is, by the farm "on the margin of cultivation. There
"
is no necessary contradiction between this result and the labor
theory of value, but this version of the theory has an interesting
connection with later "marginalist" theories where the individual
producer will choose a volume of production so as to equalize
marginal cost and price. In Ricardo's work there is no analysis
of the cost conditions on the individual farm; it is for agriculture
as a whole that competition leads to equality between price and
cost on the marginal land.
Ricardo's theory of value is a theory of price formation for pro¬
duced goods. He points out, however, that there also exist other
goods where availability does not depend on production; an ex¬
ample that he mentions are rare old coins. For such goods the
labor theory of value is clearly irrelevant, and the only thing that
Ricardo has to say about them is that their value is determined
by scarcity. He also briefly discusses Adam Smith's distinction
between natural and market prices but makes it clear that what
—
he is interested in is the natural price or the long-run equilib¬
rium price, as we would have formulated it today.

Long-run Development and the Stationary State

Ricardo's theory of rent forms the point of departure for his
-
theory of the long run development of the market economy. As
the population and workforce increase, the demand for agricul-
78
 THE CLASSICAL SCHOOL

tural goods ("com") increases also. For this demand to be satis¬

fied, less-productive land must be brought into cultivation. This
leads to an increase of rent on the more productive land and a
larger share of rent in national income. With a constant level of
—
real wages as determined by the Malthusian subsistence prin¬
—
ciple the rate of profit will fall. But with a decreasing rate of
profit the incentive to invest will weaken and gradually fall to
the level where further accumulation of capital comes to a halt.
At this point the real growth of the economy reaches an end; we
have arrived at the stationary state.11 This idea became one of the
cornerstones of classical thinking regarding the long-run pros¬
pects for the market economy.
Was the movement toward the stationary state an inevitable
process? Not entirely, according to Ricardo. Technical progress
might slow the process: "This tendency, this gravitation as it were
of profits, is happily checked at repeated intervals by the improve¬
ments in machinery ... as well as by discoveries in the science of
agriculture" (Ricardo 1817; 1951, p. 120). However, technical and
scientific innovation could only, in Ricardo's view, delay the dy¬
namic process toward a stationary state; it could not lead to any
fundamental change in it. Another factor that might cause a delay
in the advent of the stationary state was the abolition of restric¬
tions on food imports and adoption of a regime of free trade. This
is part of the explanation of Ricardo's stand in the debate about
the Com Laws: importing food would decrease the pressure on
land in England and thereby prevent the rate of profit from de¬
creasing as rapidly as it otherwise would have done. But this ef ¬
fect too is of a temporary nature; in the long run the tendency of
the rate of profit to fall and the accumulation of capital to cease is
an inevitable feature of the development of the economy.

The Theory of International Trade

Ricardo's fame today rests to a large extent on his contribution
to the theory of foreign trade, especially the theory of compara¬
tive advantage as the basis for the international division of labor.
Even students who have never been exposed to the history of

It should be noted that Ricardo himself did not use this term, which was
11

adopted by his followers.

79
 CHAPTER 4

economics will associate his name with the illustrative example

of trade between England and Portugal which occurs in virtually
every textbook exposition of the principles of international trade.
Ricardo begins his chapter on foreign trade by maintaining that
even if international trade does not directly increase "the amount
of value" in a country (because the value of exports tends to be
equal to the value of imports), it will nevertheless increase the
standard of living: "It will very powerfully contribute to increase
the mass of commodities, and therefore the sum of enjoyments"
(Ricardo 1817; 1951, p. 128).
Nevertheless, foreign trade does make a real contribution to
output or the amount of value, but its contribution is more indi¬
rect; it encourages specialization and the international division
of labor, and this leads to a more efficient use of resources in ev¬
ery single country. About free trade he says that
by increasing the general mass of productions, it diffuses general
benefit, and binds together by one common tie of interest and in¬
tercourse, the universal society of nations throughout the civilized
world. It is this principle which determines that wine shall be
made in France and Portugal, that com shall be grown in America
and Poland, and that hardware and other goods shall be manufac¬
tured in England. (Ricardo 1817; 1951, p. 134)
So what is this principle that determines the international divi¬
sion of labor? One could imagine, Ricardo says, that if the rate
of return on capital were higher in Portugal than in England,
—
capital would move from England to Portugal just as it would
move from London to Yorkshire if die rate of return were higher in
Yorkshire. But this argument is too simple, for experience shows
that the owners of capital have a strong aversion to removing
their capital and themselves to another country. This is partly
because foreign investment appears to be less certain and less
subject to the owner 's control, partly because of the "natural
disinclination" that all men have toward leaving the country of
their birth.
This reasoning forms the background to the assumptions on
which Ricardo builds his theory of foreign trade. The factors of
production are assumed to be immobile between countries while
finished goods are assumed to be perfectly mobile; a set of as¬
sumptions that would come to characterize the theory of intema-
80
 THE CLASSICAL SCHOOL

tional trade right up to our own time. The assumptions are used
to demonstrate the benefits of international specialization: when
each country adopts specialization in production and uses part
—
of its output for exports which in turn finances its imports all
countries can exploit their productive advantages in the interna¬
—
tional exchange of commodities.
How these advantages can be exploited is illuminated in the
example of trade between England and Portugal, who produce
and exchange two commodities, wine and cloth. The example is
nowadays usually presented in the form of a table of numbers,
frequently supplemented by means of equations and diagrams.
Ricardo himself has nothing of this, but his exposition is still very
clear and analytic. In his original version the numbers of man-
years it would take to produce given quantities of wine and cloth
are as follows:
England Portugal
Wine 120 80
Cloth 100 90
Obviously, Portugal is the most efficient country in the produc ¬

tion of both goods.12 In spite of this, it is to Portugal's advantage

to import cloth from England instead of producing them at home:
Though she [Portugal] could make the cloth with the labour of 90
men, she would import it from a country where it required the la¬
bour of 100 men to produce it, because it would be advantageous
to her rather to employ her capital in the production of wine, for
which she would obtain more cloth from England, than she could
produce by diverting a portion of her capital from the cultivation
of vines to the manufacture of cloth. (Ricardo 1817; 1951, p. 135)
It is accordingly not the case, as one might perhaps intuitively be ¬

lieve, that all production will take place in the high-productivity

country. It is the relative productivity or comparative advantage
that determines the location of production. For Portugal it will be
in the national interest to leave the production of cloth to English
producers and specialize in the production of wine. For in the

12 However,
modem textbooks that use a table of this type appear without
exception to let England be the most efficient country.

81
 CHAPTER 4

exchange of wine against cloth Portugal will obtain more cloth

for its input of labor than if the country had engaged in domestic
production of cloth.13
In Ricardo's Principles there is an unresolved tension between
the labor theory of value and the theory of comparative advan ¬

tage. For the producers in England and Portugal to have incen ¬

tives to specialize in the production of cloth and wine, the price of

wine relative to cloth must deviate from the relative labor content
in each of the countries; it must be higher than that of Portugal
and lower than that of England. Ricardo realizes this but remarks
only that the principles that determine relative prices in a single
country do not hold in the context of international exchange. But
what it then is that determines relative prices is a problem that he
does not pursue further. As we shall see in chapter 5, its solution
appeared first in a contribution by John Stuart Mill.
The theory of comparative advantage is an interesting dem¬
onstration of Ricardo's style when he writes about economic
theory. In his willingness to adopt simplifying assumptions and
construct stylized examples he gives a foretaste of the develop¬
ment of modem economics. He acknowledges that his theories
represent abstractions from real life, but he defends his simplifi¬
cations by the argument that they make it possible to grasp the
essence of complex problems.

The Theory of Taxation

More than one fourth of Ricardo's Principles is concerned with
taxation, and this part has a more applied character than the rest
of the book. After a short introductory chapter he discusses the
most important types of taxes, such as taxes on raw materials,
on wages, on profits, and on housing. His main interest is in the

13 There has been some discussion in the literature about which economist

deserves the honour of first having formulated the theory of comparative ad¬
vantage. It has been maintained that the theory appears both in works by Rob¬
ert Torrens and James Mill, which appeared some years before the publication
of Ricardo's Principles. But there seems to be general agreement that Ricardo's
version of the theory is the most general one and the most clearly formulated,
and that it was his exposition of it that led to its general acceptance as a corner ¬

stone of the theory of international trade. An interesting survey of the historical

debate can be found in Aldrich (2004).

82
 THE CLASSICAL SCHOOL

incidence of taxes: Who is it that in the last instance carries the

burden of taxation? His interest in this question reflects Ricardo's
conviction that the explanation of the distribution of income be¬
tween the different classes of society is the central problem of
economic theory. Rather than take a long detour into the details
of Ricardo's analysis of tax incidence, instead, I will provide a
few examples of his analytical approach.
—
Ricardo advances the hypothesis his formulation in fact sug¬
gests that the correctness of the hypothesis is beyond doubt that —
there is a significant difference between the incidence of taxes on
necessities and luxury goods. Taxes on luxuries like wine and
riding horses are paid, in the form of higher prices, by those who
consume them. But taxes on necessities are not necessarily paid
by the workers who consume them. Because the real wage of the
workers in the long run will tend toward the subsistence level,
the increase in the prices of necessities that follow from taxation
must be compensated by increases in nominal wages. In the long
run, therefore, these taxes are not paid by the workers, but by the
employers who must pay them higher wages. How large are the
effects of taxes on consumer prices? According to Ricardo, they
are completely shifted to consumer prices:
A tax on hats will raise the price of hats; a tax on shoes, the price
of shoes; if this were not the case, the tax would be finally paid by
the manufacturer; his profits would be reduced below the general
level, and he would quit his trade. (Ricardo 1817; 1951, p. 205)
This is a precise and elegant analysis. But Ricardo's conclusion is
not as general as it first appears, for in other chapters he allows
for the possibility that commodity taxes may also reduce pro¬
ducer prices. In the case of hats and shoes it is natural to suppose
that all producers face the same costs. But in agriculture, as ar¬
gued in his theory of rent, the situation may be different. A fall in
the producer price will only lead the marginal producers, those
with the highest costs, to "quit their trade," while tire others will
continue to produce. Hence it is possible for the burden of the tax
to be shared between producers and consumers.
What are the best forms of taxation? On this point Ricardo is
a little less clear. He says that "taxation under every form pre¬
sents but a choice of evils" (p. 167). However, he has a somewhat
ambivalent attitude to the rules for good taxation suggested by

83
 CHAPTER 4

Adam Smith in the Wealth of Nations. One of these rules was that
the difference between the amount paid by the citizens and the
amount collected by the government ought to be as small as
possible. This rule is open to alternative interpretations. Smith
could be referring to the desirability of low collection costs, but
he could also be interpreted more generally as maintaining that
the social cost of taxation, including the costs of price distortions,
ought to be as low as possible. In at least one connection Ricardo
appears to say that Smith's rule is meaningless, since what the
citizens pay must by definition be equal to what the govern ¬

ment receives. This is a rather narrow accounting interpretation

of Smith's rule and is probably not a good expression of Ricar¬
do's views. Elsewhere, however, he says that there are no taxes
which do not weaken the economy's "power to accumulate." It
is natural to read this as a statement that all kinds of taxes lead
the economy to function less efficiently than it would otherwise
have done.
An especially interesting element in Ricardo's theory of taxa¬
tion is his analysis of the relationship between tax and loan fi¬
nance of public expenditure. The discussion of this in chapter
XW is set in the context of war finance. Given that taxation im¬
poses efficiency costs on the economy, would it not be better to
finance the war by issuing a loan? Suppose that the war (assum¬
ing full certainty about the outcome) lasts for a year and costs the
country 20 million pounds. The government can finance the war
by collecting this amount in taxes at the beginning of the year.
Alternatively, it could issue a loan at 5 percent interest and col¬
lect an annual tax of 1 million pounds to cover interest payments.
But the economic realities of the alternatives are the same. The
payment of interest is just a transfer between the creditor and the
debtor and no cost for the nation as a whole. From the point of
view of the citizens, therefore, the government might just as well
have collected the 20 million in tax at the beginning of the war. If
any of the taxpayers were to feel that their share of this amount
was too much to pay during a single year, they could take up
a private loan so as to distribute their payments over a longer
time, but this transaction also is irrelevant for judging the eco¬
nomic position of society. In real economic terms, therefore, tax
and loan finance are equivalent from the point of view of society,
but it is clear from Ricardo's presentation that he believes that
84
 THE CLASSICAL SCHOOL

this point is difficult to realize for the ordinary citizen, and that
loan finance in this kind of situation would be unfortunate. The
reason is that loan finance induces the citizens to base their pri¬
vate decisions on an illusion that they are richer than they really
are, since in the short run they pay only 1/ 20 of the tax that they
would have to pay with the alternative form of finance. In other
words, taxpayers tend not to realize that the real economic posi¬
tion both for themselves and society is the same in the two cases.
On the background of Ricardo's analysis it is something of a
paradox that the expression "Ricardian equivalence" in modem
macroeconomics has come to stand for a hypothesis that Ricardo
definitely did not hold. The modem interpretation is that indi¬
vidual taxpayers actually see through the connection between
tax and loan finance; they understand that whether the war is
financed by loans or taxes, they have to pay the real cost of the
war. Their private choices regarding consumption and saving
should therefore be unaffected by which alternative the govern¬
ment chooses to finance the war. The modem usage could clearly
be justified by the fact that Ricardo provided such a transparent
explanation of the equivalence. On the other hand, however, it is
clear that his view is that although he himself has understood the
equivalence, there is no reason to believe that the general public
has done so! His own view is therefore that tax finance is to be
preferred because it makes people realize the true cost of the war.
When modem economists invoke the economists of the past in
support of their own views, they may sometimes provide a mis¬
leading impression of what the older economists actually said.

On Machinery
Principles of Political Economy and Taxation appeared in three edi ¬

tions during Ricardo's lifetime. Before publication both of the

second and third editions he revised the text and made a number
of alterations, most of which are concerned with details. But one
of the changes is in fact far more than a detail. At the appearance
of the third edition in 1821 Ricardo had written an entirely new
chapter with the monumental title "On Machinery." In this chap¬
ter (chapter XXXI) he discusses whether the industrial revolution
and the introduction of modem technology ("machinery")—
now much more visible than at the time of Adam Smith was a —
85
 CHAPTER 4

development that benefited all classes of society, paying special

attention to the working class. In the introductory paragraph he
says that in other connections he has expressed a view of this
question that he now believes to be erroneous, so that "it, there ¬

fore, becomes a duty in me to submit my present views to exami ¬

nation, with my reasons for entertaining them" (Ricardo 1817;

1951, p. 386).
Ricardo's original conviction had been that since the introduc ¬

tion of machinery made it possible to produce at lower cost and

sell at lower prices, the result would be a larger volume of pro ¬

duction and greater availability of goods for all classes of soci ¬

ety (abstracting from short-run structural problems). In his new

chapter he acknowledges that this line of reasoning is not entirely
correct. It is certainly true that workers will pay lower prices for
— —
consumer goods, but and this is his new insight the demand
for labor will fall because employers will substitute machinery
for human labor. It may appear as if Ricardo originally had over¬
looked a fairly obvious element in the analysis. But his line of
reasoning had been that the labor that was replaced by machin¬
ery in some industries would be absorbed by other industries
and firms. In other words, the theoretical hypothesis was that the
demand for labor was constant. He now felt that this hypothesis
must be rejected, and he formulated his new conclusion in a way
which caused considerable attention among his contemporaries:
That the opinion entertained by the labouring class, that the em¬
ployment of machinery is frequently detrimental to their interests,
is not founded on prejudice and error, but is conformable to the
correct principles of political economy. (Ricardo 1817; 1951, p. 392)
When judging his readers' reactions to this proposition, it must
be kept in mind that this was a time of great social unrest among
English workers. There were frequent protests, some of them
violent, against the introduction of new technology which, in
the workers' view, deprived them of their work. Especially dra¬
matic were the actions of the so-called Luddites (named after
their leader Ned Ludd) who in the years around 1811-13 stormed
the textile mills in the north of England and destroyed the new
machines. The prevalent view among the upper classes of society
was that the protests must be ascribed to lack of insight among
the workers who did not understand their own best interests—
86
 THE CLASSICAL SCHOOL

at least not their long-run interests. Not surprisingly therefore,

Ricardo was sharply criticized, also by some other economists,
but he considered his new view as being as securely founded as
a proof in geometry!
Actually, Ricardo's point of view was not that the new tech¬
nology necessarily went against the interests of the working class
(note the word frequently in the last quotation). It could in fact
come to benefit the workers, but this could only happen if the in¬
creased income of landowners and capitalists were so substantial
that their increased demand for consumption goods succeeded
in creating new employment for the workers that originally had
been laid off. The possible harm to workers could also be less se¬
rious if technological change progressed gradually over time and
not as suddenly as Ricardo's thought experiment might indicate.
The stir created by Ricardo's new view of this question says
much about his standing as an economist during his lifetime,
which continued to be high long after his death. His restatement
and development of the labor theory of value, his theory of rent,
and his analysis of foreign trade together constitute some of the
high points of the economic theory of the classical school. The
clarity and rigour of his exposition also contributed to making
Ricardo's work an important reference for almost all further de ¬

velopment of economic theory during the nineteenth century.

FURTHER READING

Malthus's Essay on Population is still a very enjoyable book to

read, easily accessible to the modem reader. This is especially
true of the first edition of 1798, which conveys the impression of
having been written with great enthusiasm by a writer who feels
that he has an epoch-making new message. There are several edi¬
tions of the First Essay. The quotations in the text have been taken
from the Pelican Classics edition from 1970. The Second Essay ex¬
ists in an excellent edition by Cambridge University Press (1992)
with an introduction by Donald Winch. It is based on the 1803
edition but with footnotes that refer to the changes made in the
later editions.
Economists, demographers, and philosophers have all been
interested in Malthus's work, and the literature about him is
87
 CHAPTER 4

therefore very extensive. There are several articles about him and
his work, including further references, in The New Palgrave. For
a short biography, there is no better alternative than Keynes's
(1933) brilliant article. The standard life of Malthus is by Patricia
James (1979), who is also the editor of Malthus's travel diaries
that were first discovered in the 1960s and published as Malthus
(1966). It contains a number of interesting observations particu ¬

larly of life in the Scandinavian countries with emphasis on eco¬

nomic and social conditions. Malthus also had more general in¬
terests; he notes, for instance, that Norwegian women are often
very beautiful, while the men are rather below the average!
The Italian economist Piero Sraffa, who spent most of his aca ¬

demic life at Cambridge University, began to edit Ricardo's col¬

lected works, including his correspondence, newspaper articles
and parliamentary speeches, in 1931. This work developed al¬
most into a lifetime occupation, and the first volume did not
appear in print until 1951. The edition as a whole is regarded
as a truly major work of academic scholarship, and Sraffa's in¬
troductions and notes on the text form an important part of the
literature on Ricardo. All quotations in the present chapter are
taken from Sraffa's edition of The Works and Correspondence of
David Ricardo.
Ricardo's contributions to economic theory have been de ¬

scribed in all textbooks on the history of economic thought. The

most extensive monograph treatment of his economics is by
Samuel Hollander (1979). Stigler 's article about Ricardo and the
labor theory of value has been reprinted in a collection of essays
(Stigler 1965) which also contains a number of other important
articles on the history of economic thought. The friendship be¬
tween Malthus and Ricardo has been beautifully described in an
article by Robert Dorfman (1989).

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