Smith and Ricardo 207Ricardo was trying to identify some of the economic forces
involved in the Industrial Revolution in England. He tried to set
up a system of analysis whose core is composed of distribution
and growth theories. The main categories of this system are the
theories of diminishing returns, value, rent, wages, distribution,
international trade and taxation.
All of Ricardo’s economic theory is abstract, using as a model
a giant com farm. With this model, Ricardo demonstrates the law
of diminishing returns by showing that if increasing amounts of
capital or labor (variable factors) are applied to the land (fixed
factor), the increase in corn, or total product— as each additional
quantity of capital or labor is applied— will eventually decrease.
In other words, successive inputs of capital or labor will result in
decreasingly smaller increases of com. Much of Ricardo’s
theory deals with corn; during his lifetime he argued vehemently
against the com laws which he felt were the cause of the high
price of food in England. Obviously, if the law of diminishing
returns was valid, and there were restrictions on the importation
of com, the price would have to be abnormally high.
Ricardo’s theory of value is based on his contention that the
exchange value of a commodity is determined by the amount of
labor required for its production. There is a presumption here
that a commodity has to be useful, before it can be considered
valuable. The obvious exception however, are commodities
such as diamonds, other gems, art objects, and rare items whose
value is based on their desirability and the wealth and depth of
desire of those who would pay for them. Since so few commodi
ties obtain their value by desire, and so many gain their value
through their usefulness, the importance of labor as value is
important.
His theory of differential rent however poses another prob
lem. Here labor does not determine price. If, he says, there is a
great demand for corn, and there are two farms one of which is
more fertile, the more fertile land will produce more com with
the same input of capital and labor, than the less fertile land. If
the land of farm A can produce one hundred bushels of com per
acre, and in order to survive must charge one dollar a bushel, then
if farm B is more fertile and yields one hundred fifty bushels an
acre—farm A will set the price and farm B ’ s landlord will be able
to charge a higher rent—to the tune of fifty dollars an acre.