Question

"History of Economic Thought" short answer question

Why is David Ricardo considered to be such an important figure in the development of economic thinking, and what are the major strengths and weaknesses of his contributions? Discuss.

Answer 1

Theory of Rent and Comparative Advantage Trade is Two most fundamental contribution of David Ricardo in development of Economics. His theory of labor value was the starting point of his theory of international trade. In his comparative advantage theory of trade, he explained that nations can get benefited by specializing in the production of those goods which they can produce most efficiently, comparison to other countries and trading them for goods which are most efficiently produced elsewhere in the world. According to him this type of trade (Comparative advantage) is most benefited to all the partners who involve in trading and provides formal rationale for free trade policy.

He also contributed in Principles of political economy and taxation, in which he explained the laws of determining the distribution of everything which can be produced by major three classes which are- the workers, the landlords and the capital owners. He contributed in the notion of economic rent- payment in exchange for use of something. He argues that rent is what remains from gross farm revenue after all the cost of production have been paid. According to him rent tends to increase as population increase because it requires more food for larger population which costs them higher for cultivating more food.

Ricardo’s theory of comparative advantage has forms the basis of the neoliberal economists for free trade and also form basis of the first attempt to abolish capitalist crises.

Disadvantages: There are many criticism laid on Ricardo’s views on international trade and free trade like his in his theory of comparative advantage, he argues that capital and labor are not internationally mobile which criticized as unrealistic assumption by Neoclassical economists. In his theory of trade he assumes that trade will always be balanced which is proven unrealistic assumption later. "Labor and capital are fully utilized" is another assumption which is not realistic.