208 Economic Theory: An IntroductionBecause Ricardo subscribed to the labor theory of value, he
smarted at the thought of landlords getting rich through this
system of differential rent. Of the three elements which consti
tute cost—labor, capital and rent— Ricardo felt rent to be un
earned.
Ricardo sees the economic world as expanding constantly and
simultaneously with the population. More people means more
food is needed which in turn means more fields are needed. The
cost of grain will go up because the new fields that are cultivated
to meet the growing demand for food will not be as productive.
The are not as productive because wise farmers will have used
up their good land first. As the cost of grain rises so do the selling
price of grain and the rents of those landlords holding the most
fertile land. Consistent with the upward trend, wages also
increase because the laborer needs more money to buy enough
of the more expensive grain to stay alive. This leads Ricardo to
formulate his “iron law of wages.”
The iron law of wages states that wages will always exist at a
subsistence level, thus the laborer can never rise above that level.
This gloomy forecast is based on his contention that “Profits
depend on high or low wages. The natural tendency of profits
then is to fall: for, in the progress of society and wealth, the
additional quantity of food required is obtained by the sacrifice
of more and more labor.” He predicted further doom for wages
with the advent of machinery.
In the area of international trade Ricardo took Adam Smith’s
assertion that it was advantageous for a country to produce those
goods in whose production it has an absolute advantage and
expanded it into a concept which stated that it would be benefi
cial to produce goods in which the country has a comparative
advantage. The theory of absolute advantage calls for nations to
produce and sell a good that it produces more efficiently than
anyone else. The theory of comparative advantage states that
nations have a shared ability to produce several goods more
efficiently than other goods. He illustrated his theory by using
Portugal and England as examples. If in England it takes the
labor of 100 men to produce a certain amount of cloth and the
labor of 120 men to produce a comparable amount of wine that
will exchange for the cloth—then—if Portugal can produce an
equivalent amount of wine with 80 men and cloth with 90 men—