The Investor's Shelf — one book
On the Principles of Political Economy and T

On the Principles of Political Economy and Taxation

David Ricardo
1817
T1 371 pages · about 6h 11m to read OL1097148Wgoodreads

Summary

David Ricardo published this in 1817 and it established the deductive method in economics: state assumptions, reason rigorously from them, and derive conclusions without regard to whether they are comfortable. The book is difficult, compressed and organised badly, and it dominated economic thought for the following half century.

The two arguments everyone knows are comparative advantage and differential rent. Comparative advantage, illustrated with English cloth and Portuguese wine, shows that mutually beneficial trade arises from differences in relative production costs, so that a country less efficient at producing everything still gains from specialising in what it produces least inefficiently. Differential rent explains rent as the surplus arising from differences in land fertility: as population grows, less fertile land is cultivated, the price of corn rises to cover the cost on the worst land in use, and owners of better land collect the difference. Ricardo used this to argue against the Corn Laws, since protection raised food prices, raised rents, raised the wages manufacturers had to pay, and reduced profits and accumulation.

The book also contains the labour theory of value that Ricardo held in a qualified form and that Marx developed, the analysis of the effects of taxation on different classes, the argument later formalised as Ricardian equivalence about the equivalence of debt and tax finance, and a chapter added in the third edition conceding that machinery can reduce the demand for labour. Ricardo's system was superseded by marginalism in the 1870s, and his value theory is not used. Comparative advantage remains the foundation of trade theory, and his method of reasoning from explicit assumptions defined the discipline.

Key takeaways 7

  1. Trade benefits both parties when their relative production costs differ, even when one produces everything more efficiently.
  2. Rent is the surplus that accrues to owners of better land as inferior land is brought into cultivation, not a cost that raises prices.
  3. Protection of agriculture raises food prices and therefore wages, which reduces profits and slows capital accumulation.
  4. The interests of landowners are structurally opposed to those of manufacturers and workers under a growing population.
  5. Ricardo conceded that the introduction of machinery can reduce the demand for labour, contradicting his own earlier position.
  6. Government borrowing and taxation impose the same burden, since the debt must eventually be paid from taxes.
  7. Ricardo's method of reasoning deductively from stated assumptions defined how economics has been done since.

Who should read it

Investors and analysts who want the origin of comparative advantage and of rent theory in the author's own difficult words, and the method economics inherited from him.

Where it sits in the reference 2

Philosophy
Mental models

Similar books 6

Chosen by shared topics, the entries that hold them, and the people who recommended both.

Basic Economics
Basic EconomicsThomas Sowell
Economics in One Lesson
Economics in One LessonHenry Hazlitt
The Invisible Heart: An Economic Romance
The Invisible Heart: An Economic RomanceRussell Roberts
The Power of Productivity
The Power of ProductivityWilliam W. Lewis
The Rational Optimist: How Prosperity Evolve
The Rational Optimist: How Prosperity EvolvesMatt Ridley
The Undercover Economist
The Undercover EconomistTim Harford