Classical Economics: David Ricardo

David Ricardo (1772-1823) is one of history's most influential economists, from whose thinking both neoclassical and modern economics derive. Born in England, Ricardo made a fortune on the London Stock Exchange. This wealth gave him the time to write and to serve in Parliament's House of Commons. His most famous work,

Principles of Political Economy and Taxation (1817), marked him as the greatest spokesman for classical economics since Adam Smith.

One of Ricardo’s contributions lay in a thorough analysis of the nature of economic rent – a theory that survives almost intact today. He also presented a careful analysis of the labor theory of value. But his major contribution was his analysis of the laws of income distribution in a capitalist economy.

Ricardo is especially famous in international economics for demonstrating the advantages of free trade. Free trade is a policy in which tariffs and other barriers to trade between nations are removed. To prove his point, Ricardo developed a concept we now call the law of comparative advantage. Comparative advantage enabled him to demonstrate that one nation might profitably import goods from another even though the importing country could produce that item for less than the exporter.

As Member of Parliament, Ricardo pressed the government to abandon its traditional policy of protection. Though he did not live to achieve that goal, his efforts bore fruit in the 1840’s when England became the first industrial power to adopt a policy of free trade. There followed 70 years of economic growth during which the nation became the world's wealthiest industrial power.

Karl Marx

Karl Marx (1818-1883) was a philosopher, economists and a revolutionary. The first volume of his Das Kapital was published in 1867 but the rest of his work did not appear until after his death. His theory explains the origin and the historical development of the

capitalist economic system. Class analysis, the central component of Marxism, is not peculiar to Marx but was shared by contemporary political economists, such as Adam Smith and David Ricardo.

The center of Marx's economics was the labor theory of value. Marx assumed that it is labor power that gives value to a commodity – both the direct labor and the indirect labor embodied in buildings or machinery used up in the productive process. Marx realized that, under competitive capitalism, market prices would not necessarily equal labor values because capitalists receive an excess in revenues over labor costs – a surplus value by which Marx meant the difference between revenues and total labor costs.

The economic interpretation of history is one of Marx s lasting contributions to Western thought. Marx argued that economic interests lie behind and determine our values. Why do business executives vote for conservative candidates, while labor leaders support those who advocate raising the minimum wage or increasing unemployment benefits? The reason, Marx held, is that people's beliefs and ideologies reflect the material interests of their social and economic class.