On the Principles of Political Economy and Taxation

Summary

On the Principles of Political Economy, and Taxation is the treatise David Ricardo published in London in April 1817, when he was a retired stockbroker of forty-five who had already made his name in the bullion and corn-law controversies. Its Preface states the problem at once: the produce of the earth is divided among landlords, capitalists and labourers as rent, profit and wages, and the task of political economy is to find the laws that govern that division as a society grows. Ricardo begins with value. Usefulness, he argues, is necessary for a thing to have value but does not measure it; apart from rare goods such as old paintings, the exchange value of a commodity depends on the comparative quantity of labour needed to produce it, including the labour stored in tools and buildings. The chapter on rent then explains why landlords are paid at all. As population grows, poorer or more distant land must be brought into cultivation, and the better land earns a surplus equal to the difference in what equal labour and capital produce on each. Rent is therefore a result of high corn prices, not a cause of them. Wages tend toward the cost of the labourer's customary subsistence, and because that cost rises as food grows dearer, profits tend to fall as wealth advances, unless improvements in farming or cheaper imported corn check the rise. The chapter on foreign trade contains the book's most lasting idea. Using England, Portugal, cloth and wine, Ricardo shows that two countries can both gain from specialization and trade even when one of them is more efficient at producing both goods, so long as their comparative costs differ. The second half of the book applies these principles to taxation, examining taxes on rent, tithes, land, profits, wages, raw produce and luxuries, the poor rates, bounties on exports and prohibitions on imports, with chapters on currency and banking and running replies to Adam Smith, Jean-Baptiste Say and Thomas Malthus. Written in a dry, deductive style with numerical examples, the book shaped classical economics for half a century. Its labour theory of value was taken up by socialist writers, its case for free trade supported the repeal of the Corn Laws, and its method of abstract model-building is still associated with his name.

Plot or Argument

• Preface: the problem of distribution

  The produce of the earth is shared among landlords, capitalists and labourers as rent, profit and wages; the laws governing these shares are the principal problem of political economy.

• Value and labour

  Utility is essential to value but does not measure it. For reproducible goods, exchange value depends on the relative quantity of labour needed to produce them, including labour bestowed on the tools and buildings that assist production.

• Rent

  As population grows, less fertile land is cultivated; the better land earns a rent equal to the difference in its produce. In Ricardo's words, corn is not high because a rent is paid, but a rent is paid because corn is high. A parallel chapter treats the rent of mines.

• Price, wages and profits

  Market prices oscillate around natural prices set by costs. The natural price of labour is the cost of the labourer's customary subsistence. Rising food costs raise money wages and lower the rate of profit as wealth grows, unless checked by improvement or imports.

• Foreign trade

  With the example of English cloth and Portuguese wine, Ricardo shows that both countries gain from specializing according to comparative, not absolute, cost; free commerce connects individual advantage with the general good.

• Taxation

  A long sequence of chapters traces who really bears taxes on rent, tithes, land, raw produce, gold, houses, profits, wages and other commodities, and examines the poor rates and sudden changes in the channels of trade.

• Bounties, colonies and money

  Chapters on bounties and prohibitions, colonial trade, gross and net revenue, and currency and banks apply the theory to policy questions of the day, favouring free trade and a convertible currency.

• Replies to other economists

  Later chapters distinguish value from riches against Say, criticize Adam Smith's doctrine of the rent of land, deny that supply and demand alone regulate prices in the long run, and end with a critique of Malthus's opinions on rent.

Lessons

• Gains from trade

  Ricardo's cloth-and-wine example shows that trade can benefit both parties even when one is better at everything, because what matters is relative cost. The idea remains one of the most cited arguments in economics for open commerce.

  • Why does Portugal gain by importing cloth even though it could make cloth with less labour than England?
  • What assumptions about workers and capital does the example make, and what happens if they do not hold?

• Who gets what, and why

  Ricardo treats economics as the study of how output is divided among social classes. His theory implies that landlords gain from population growth and protection, while capitalists and, indirectly, workers lose.

  • Why does Ricardo think the interest of landlords is opposed to that of other classes?
  • How did this argument bear on the Corn Laws debate?

• Thinking in models

  Ricardo simplifies a complicated economy into a few variables and follows their logic with numbers. The method gains clarity and rigour but can mislead when the simplifying assumptions are forgotten.

  • What does Ricardo leave out in order to make his reasoning clear?
  • When is a simplified model useful in thinking about public policy, and when is it dangerous?

• Who really pays a tax

  Much of the book asks where the burden of a tax finally falls, since the person who hands over the money may pass it on through prices. This question of tax incidence is still central to public finance.

  • According to Ricardo, who ultimately pays a tax on raw produce?
  • Why might a tax that looks fair on paper fall heavily on people it was not meant to burden?

Context

The Principles appeared two years after the end of the Napoleonic Wars, in a Britain troubled by debt, a suspended gold standard, high grain prices and the Corn Law of 1815, which restricted imports of foreign corn. Economists such as Thomas Malthus, James Mill and Ricardo debated how population, food and profits were connected and whether the landed interest should be protected.

Composition

Ricardo had argued about rent and profits in his Essay on the Influence of a Low Price of Corn on the Profits of Stock (1815). Encouraged by James Mill, he expanded his ideas into a full treatise, published by John Murray in April 1817. A second edition followed in 1819 and a third in 1821, which added the chapter On Machinery; the library text is the 1817 first edition.

Reception

The book quickly became the core of classical political economy, taught and popularized by James Mill and J. R. McCulloch and later systematized by John Stuart Mill. Its labour theory of value was adapted by Ricardian socialists and by Karl Marx, while the marginalist economists of the 1870s rejected it. Comparative advantage became a foundation of the case for free trade and of international economics.

Comparisons

• The Wealth of Nations

  Ricardo's starting point: he accepts Smith's case for free trade but replaces his account of rent and value with a sharper, more abstract theory, and argues with him directly in later chapters.

• A Treatise on Political Economy

  Say and Ricardo corresponded and read each other closely; Ricardo accepted Say's law of markets but disputed his views on value and rent in the closing chapters.

• Principles of Political Economy

  Mill's Principles restated Ricardo's theories of rent, wages and foreign trade for a later generation while adding his own ideas on distribution and reform.

• Capital, Volume I

  Marx took Ricardo's labour theory of value as his point of departure and turned it toward a theory of surplus value and exploitation that Ricardo did not draw.

• Principles of Economics

  Menger's subjective theory of value, published fifty-four years later, rejects the labour-cost account of value on which Ricardo built.

• The Law

  Bastiat, a French free-trader, shared Ricardo's opposition to protective tariffs but argued against them on grounds of justice as much as economic efficiency.

• Capitalism and Freedom

  Friedman's defence of free international trade in the twentieth century still rests on the gains from specialization that Ricardo first demonstrated.

Quotes

For Students

A reading companion for classical Christian high school students. See the student guide.

Reading Guide

Watch for

• The Preface's three classes and three shares: rent, profit and wages.
• The step in the rent chapter where cultivation spreads to poorer land and rent appears on the better land.
• How the price of food links wages and profits in Ricardo's reasoning.
• The numbers in the cloth-and-wine example and what they are meant to show.
• How often the tax chapters ask who finally bears a tax.

Key terms and names

Exchangeable value

The power of a good to purchase other goods; Ricardo distinguishes it from usefulness and ties it to the labour needed for production.

Rent

Payment to the landlord for the original powers of the soil; in Ricardo's theory, the surplus produced by better land over the least fertile land in use.

Natural price of labour

The wage needed for labourers to subsist and maintain their numbers, as distinct from the fluctuating market wage.

Comparative advantage

Producing the good one makes at lowest relative cost; the basis of Ricardo's argument that both trading nations gain.

Corn Laws

British tariffs restricting the import of foreign grain, strengthened in 1815 and repealed in 1846.

Incidence of a tax

Where the burden of a tax finally falls after prices, wages and rents adjust.

Seminar Questions

1. Comprehension According to the Preface, what is the principal problem of political economy?
2. Comprehension Why, in Ricardo's account, does rent appear only when less fertile land comes into use?
3. Comprehension What do the numbers 80, 90, 100 and 120 represent in the example of England and Portugal?
4. Interpretation Ricardo calls utility essential to value but not its measure. What does he gain and what does he lose by this distinction?
5. Interpretation Why does Ricardo expect the rate of profit to fall as a country grows richer, and what could prevent it?
6. Interpretation Is Ricardo's view of the classes of society neutral description or a political argument?
7. Big Question If free trade makes a nation richer overall but harms some of its people, what does the nation owe to those who lose?

Faith Connections

• Genesis 3:17-19 (Scripture)

  The curse of toilsome labour on the ground stands behind every classical discussion of diminishing returns; Ricardo's poorer soils yield less for the same sweat.

• Leviticus 25:23 (Scripture)

  The land shall not be sold for ever, for the land is mine. The Jubilee law gives a scriptural angle on Ricardo's question of who should benefit from the powers of the soil.

• Leo XIII, Rerum Novarum (1891) (Great Conversation)

  The encyclical's discussion of wages, property and the condition of workers answers the classical claim that wages tend toward bare subsistence.

Logic and Rhetoric

Central argument: Value depends on the labour required to produce goods. Because more people require cultivation of worse land, the cost of food rises, rent on better land rises, money wages rise and profits fall. Free import of corn and free trade generally, guided by comparative cost, check this tendency and benefit all trading nations.

Rhetorical device: hypothetical numerical example. Ricardo supposes England needs 100 men for cloth and 120 for wine while Portugal needs 90 and 80, and lets the arithmetic show that both gain from trade.

Debate: Resolved: that free trade benefits every nation that practises it.

Memory Work

Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each.

Rent is that portion of the produce of the earth, which is paid to the landlord for the use of the original and indestructible powers of the soil.

Writing Prompts

Essay: Explain Ricardo's theory of comparative advantage using his own example, then evaluate one objection to it, such as the immobility of workers or the strategic importance of some industries.

Comparison with The Wealth of Nations: Smith and Ricardo both argue for free trade. Compare Smith's appeal to the division of labour with Ricardo's comparative advantage, and decide which argument is stronger and why.

Creative Prompts

• Classroom

  Divide the class into two islands with different costs for producing two goods; let them trade at an agreed rate and record total output before and after specialization to test Ricardo's claim.

• Dialogue

  Write a conversation between Ricardo and his friend Thomas Malthus in 1817 about whether the Corn Laws protect the nation or only the landlords.

• Essay

  Ricardo says rent is paid because corn is dear, not that corn is dear because rent is paid. Explain the reasoning and test it against a modern example such as city land prices.

Further Reading

• An Essay on the Principle of Population, Thomas Robert Malthus

  The population theory on which Ricardo's view of wages and rent depends.

• The Wealth of Nations, Adam Smith

• The Worldly Philosophers, Robert L. Heilbroner

  A popular history with a chapter on Malthus and Ricardo.