The Father of Free Trade

The Father of Free Trade

“David Ricardo: Theory of Free International Trade” by Robert L. Formaini, in Economic Insights (Vol. 9, No. 2), Public Affairs Dept., Federal Reserve Bank of Dallas, P.O. Box 655906, Dallas, Texas 75265–6906.

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Competition from foreign goods and the “outsourcing” of jobs overseas have cost many Americans their jobs—or roused fear that they might. Yet most economists, rising in defense of free trade, say that the disruption is all for the best. Where in the world did they get that notion? From a brilliant 19th-century economic theorist named David Ricardo.

Born in London in 1772, Ricardo became a prosperous stockbroker before turning to political economy. He set down “what was to become a key idea in neoclassical economics: the so-called law of diminishing returns as it applied to labor and capital,” writes Formaini, a senior economist at the Dallas Federal Reserve Bank. Farming, for example, faced diminishing returns because the quantity of land is limited: More intensive cultivation would eventually lead to lower profits. As the price of home-grown corn rose, Ricardo argued in On the Principles of Political Economy and Taxation (1817), Britain would benefit by importing corn from countries able to produce it at lower cost. He was a leading opponent of England’s Corn Laws of 1815, which barred food imports.

Ricardo also formulated the theory of comparative advantage, showing how two nations—each able, because of its particular natural advantages, to produce a different product at lower cost than the other—could increase their total output and lower their costs through specialization and trade. “It is this principle,” Ricardo wrote, “which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England.”

That was hardly the end of his contributions to economic thought. For example, his doctrine of fiscal equivalence, now called Ricardian equivalence, held that the economic effects are the same whether government finances its activities through debt or taxes.

Ricardo didn’t live to see his theories prevail. He died of an ear infection in 1823, leaving a fortune worth $126 million in today’s dollars. Twenty-three years after his death, the Corn Laws were repealed and his free-trade agenda was enshrined in British policy. “Britain became the ‘workshop of the world,’ importing most of its food and ‘outsourcing’ most of its agricultural employment.” As the 20th-century economist John Maynard Keynes put it, “Ricardo conquered England as completely as the Holy Inquisition conquered Spain.”

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