Monday, 19 March 2012 08:32

David Ricardo: Men of Ideas

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David Ricardo (1772-1823) systematized the economic theory laid down by Adam Smith and Thomas Malthus and helped make the study of economics a formal academic discipline.

In addition to systematizing the discipline, Ricardo added to the discipline with his Labor Theory of Value (explicated in his book, Principles of Political Economy and Taxation).

Ricardo was not the first person to talk about labor added value but was the first to formally articulate it in an academic text book. That which exists in nature may or may not have value but it is the labor expended on it to make it desirable for folk to buy that gives it the economic value it has. Consider gold, it exists in nature but to get it labor is expended. It takes a lot of man hours to extract an ounce of gold from nature. If every one could have access to gold without the type of arduous effort required to do so gold probably would have no value.

Ricardo also talked about the Theory of Comparative Advantage. Consider the production of a product that could be produced in all countries. What would be the advantage of some countries choosing not to produce it and letting other countries to do so? 

Some countries might want to produce only those goods and services that they are able to produce cheaply and sell cheaply. If the cost of labor is cheap in a country it may affect the choice to produce certain goods.

The United States, for example, has a well educated work force. It probably has comparative advantage if it devotes itself to manufacturing those products that require highly skilled labor and sell them to other countries than try to manufacture those goods that require low skilled labor.

Indonesia, on the other hand, has low skilled labor. It can easily produce those goods that require unskilled labor and sell them to the United States of America.

The theory of Comparative Advantage forms the basis of contemporary trade policy. Ricardo was opposed to most tariffs and protectionism.

The idea of equivalence is often attributed to Ricardo but it is not proved that he originated it. Equivalence suggests that sometimes it makes no difference how government obtains money to do something, through taxation or through borrowing it. For example, George Bush obtained the money to pay for his Iraq war not through raising taxes on the American people but by borrowing it. Apparently, George Bush and his economic team believe in equivalence.

Equivalence is not without cost. The debt that George Bush is accumulating will, sooner or later, be paid and if the economy is unable to generate the revenue to-do so the future does not bode well for the country.  America is almost nine trillion dollars in debt; this debt has to be financed and the result is the redirection of crucial funds to non productive areas.

Ricardo developed such accepted economic concepts as rent, wages, price, profits and costs of production. These ideas are well covered in most textbooks on economics that we need not detain ourselves discussing them. Suffice it to say that Ricardo’s views on these subjects were very rudimentary and have been refined by other thinkers. For example, we now have a better understanding of price.

Price of goods sold is not just pegged to the cost of production and what the producer wants to sell and make profit. What the consumer is willing to pay plays a role in price.

Equilibrium price is that price that the supplier and the buyer find mutually acceptable.

There is a break even point for the producer, where price covers his cost of production and he makes minimal profit, a price below which he would not make profit and therefore would have to exit the market.

The same goes for wages. Clearly, wage reflects the value of labor to the producer. But many factors enter the equation in determining wages, factors that go beyond supply and demand.

Consider the wages paid medical doctors in the USA. If the market were the only force determining the wage of medical doctors, they probably would not make half of what they currently make.  Restriction of supply (via restricting the production of medical doctors, via low admissions to medical schools) and other shenanigans played by the medical association plays a role in the wages medical doctors make. Milton Friedman would like to see an end to this behavior, including the state not licensing doctors and other professionals.

Race and gender play roles in wages. Jobs that are mainly performed by women tend to be paid low wages, low comparable worth (such as teaching, nursing, psychotherapy etc)

We can go on and on talking about these standard economic issues but we would not be better in our understanding of Ricardo.

RFERENCE

David Ricardo. On The Principles of Political Economy and Taxation. (1817)

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Ozodi Osuji Ph.D

Ozodi Thomas Osuji is from Imo State, Nigeria. He obtained his PhD from UCLA. He taught at a couple of Universities and decided to go back to school and study psychology. Thereafter, he worked in the mental health field and was the Executive Director of two mental health agencies. He subsequently left the mental health environment with the goal of being less influenced by others perspectives, so as to be able to think for himself and synthesize Western, Asian and African perspectives on phenomena. Dr Osuji’s goal is to provide us with a unique perspective, one that is not strictly Western or African but a synthesis of both. Dr Osuji teaches, writes and consults on leadership, management, politics, psychology and religions. Dr Osuji is married and has three children; he lives at Anchorage, Alaska, USA.

He can be reached at: ozodiosuji@gmail.com (907) 310-8176