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.

Top 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.

• 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.

• 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.

• 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.

Verified Quotes