One of the most important classical economist in England was David Ricardo.
He started out as a stockbroker following in his father’s footsteps
joining the family firm.
He retired from being a stockbroker at a young age
having a massive enough wealth to live on and become a gentleman of leisure,
and was on vacation with the family,
and tried to do some light beach reading,
and picked up Adam Smith's "An Inquiry into the Nature and Causes of the Wealth of Nations."
Ricardo was riveted, absolutely riveted.
And so for his retirement career
he took up political economy.
Ricardo developed a strong correspondence
and working relationship with Thomas Malthus.
In many ways, --
Malthus' population theory arguments --
undergirded Ricardo's theories.
But at the same time they were also antagonist in certain ways.
So they both very actively wrote letters,
back and forth,
to newspapers, various periodicals.
So they had this very lively --
public epistolary --
working antagonism that was a healthy and constructive one --
and generated a lot of ideas exploration and a lot of new knowledge.
The Napoleonic War's going on.
So, --
in about 1804, with --
the British blockade in the English Channel.
And Napoleon's response to the English blockade
of their continental system that basically said:
All right, if you're gonna put a blockade up against French ships in the English Channel,
we are going to close all of our ports and all of our market towns
to any kind of British merchandise whatsoever.
That meant that their traditional import of wheat,
or grains more generally, as they were called at the time corn,
corn means grain more generally.
Their traditionally import of wheat from places like Russia were interrupted.
So a lot of the increase in wheat prices were being felt by the poorest workers,
the poorest residents in England.
And one of the other consequences was that
those who grew wheat and sold wheat
were profiting very handsomely.
So, some parties are arguing for trying to find substitute import of grains.
And farmers or land owners,
who also themselves are often neither members of parliament at this time
or very very friendly with other members of parliament at this time,
do a very effective job of implementing, in England in 1804, corn laws.
And corn laws basically impose a tariff on any imported grain.
Taking this idea that price is determined by wages, rent and profits, --
how does that high rent to land affect prices?
This is Ricardo's argument.
And how does that affect income and wealth distribution?
Because, if people who consume bread are paying higher prices
tend to be lower income workers,
and people who are receiving higher prices are land owners.
Ricardo was concerned about the income distribution that's implied by that impact.
So, he wants to build a theory.
What he is gonna do is he is gonna take
the economist Turgot's ideas of diminishing returns.
Turgot was finance administer briefly in France for Louis XVI,
was friendly with the physiocrats,
and developed a lot of new ideas.
And in the late 1860s,
he wrote a piece where he developed this idea of diminishing returns.
Turgot more generally thought of diminishing returns in terms of land.
And that the more land you bring under cultivation,
that that incremental land is not necessarily going to yield you as much per acre
as the previous ones did.
Ricardo takes Turgot's idea of diminishing returns and runs with it.
He starts by defining rent as
the original indestructible powers of the soil.
Ricardo's idea is that the land itself,
this fixed supply factor, this fixed supply input into production
has original and indestructible characteristics
that contribute to the production of commodities,
agricultural commodities in this case.
And that the return to land
is the return to these original and indestructible powers of the soil.
So he builds this theoretical model with two inputs.
And the two inputs are land,
and this land is going to be a fixed factor with no alternative uses
other than growing crops.
And the other input is --
a composite input of labor and capital that I call "man with shovel."
The idea with man with shovel is obviously labor plus capital.
If you hire an other worker,
that worker is not going to increase agricultural output
unless that worker also has a shovel.
You can think of it as a fixed proportion production function
where each unit of labor is paired with a unit of capital.
So, man with shovel.
This is what Ricardo's question is:
What happens to the rent that accrues to the indestructible power of the soil --
as you introduce successive doses of labor and capital.
So notice here that he's not developing in a way that we've come to developed it,
but he's very much using a marginal analysis here.
What he ultimately is going to argue is that
because labor and capital are more flexible
and are more easy to increase
where land is in fixed supply
that if you think in terms of the split
of the share of national income that's gonna go to the wages, rents and profits
that because land is in fixed supply, it's always gonna be the scarce resource.
And so rents are gonna increase as a shared national income.
And so that's his concern when he thinks about the distribution implications
of these protectionist policies such as the corn laws.
So the policy implication that he draws from this is pretty straightforward.
That reducing trade barriers, reducing importing tariffs,
allowing for free trade will reduce --
those what he sees is as artificial augmentations to the rent
that accrues to land
and the shift of the share of national income
from labor to land owners to land.
And so that's Ricardo's argument in his rent theory for free trade policy.
In the 1830s,
the Anti-Corn Law League was established
by some of the classical liberal policy makers of the day,
Richard Cobden and John Bright.
And they worked vigorously for a decade
and ultimately got the political coalition they needed to end a changing government
to bring about the repeal of the Corn Laws in 1846.
And Ricardo's rent theory and his theory of comparative advantage
both laid the theoretical foundation
for this political move towards free trade
and the lower barriers and lower grain prices.