Book Review: On the Principles of Political Economy and Taxation
Updated: Dec 2, 2018
Is David Ricardo just an echo of Adam Smith or can he offer a distinctive economic analysis?
Written forty years after the Wealth of Nations David Ricardo clearly lives in the shadow of the Father of Economics. References to Smith are regular and Ricardo often repeats and explains Smith's theory. At a few points Ricardo does highlight his objections to some of Smith's points, most of these corrections seem convincing but none are major shifts from Smith's theory. Fundamentally, Ricardo was a classical economist like Smith and even to a greater extent. He is more representative of the stereotypical free market economist given he opposed the poor laws for their intervention in the labour market and believed output was determined by the costs of production not levels of demand. He also believed in Smith's theory of the natural and market price which supposes that prices will naturally converge to a level where profits are the same across all industries because then no entrepreneurs will decide to switch industries.
Overall, in terms of length On the Principles of Political Economy and Taxation is much more manageable to read being less than 300 pages. If you are looking for a shorter summary of classical ideas I think this book is a better starter than the Wealth of Nations. However, I thought Ricardo's style was less elegant and understandable which meant some concepts were hard to grasp such as Ricardo's theory of value. Perseverance is needed but the rewards will come. On the other hand Ricardo, like so many classical economists, was a pure theorist, so you don't need to be worried about being confused by complex maths.
In many ways, On the Principles of Political Economy and Taxation can be seen as an update of Adam Smith because it takes into account the industrial changes of the past 40 years. As part of this Ricardo examines in more depth individual classes rather than society as a whole as Smith does. Ricardo breaks down his analysis into looking at landowners, owners of capital and labourers and despite his position as a very wealthy stockbroker he sees landowners as parasites who serve no useful social function; "The interest of the landlord is always opposed to that of the consumer and manufacturer." Perhaps because the grain crisis turned Ricardo against landowners as they were responsible for ensuring the Corn Laws kept prices high. Ricardo shares Smith's disdain for the Corn Laws and advocated free trade to a similar extent. He agrees that a country should produce the goods it is best at and trade cheaper and a greater variety of goods. Ricardo is perhaps most famous for his theory of comparative advantage, although this is actually a small part of the book and is only one chapter. If you are looking for an analysis of foreign trade only read this chapter and perhaps avoid the book if this is your only motivation.
Instead the largest part is about taxation with eleven chapters dedicated to it. Ricardo takes a view that "taxation under every form represents a choice of evils" because he thought any greater taxes would always mean lower spending and create unemployment. He also believed there are many unintended consequences. However, refreshingly, although Ricardo was a rich man he does not analyse taxation from a selfish perspective, instead he looks at the effects of the economy as a whole including workers. Ricardo agreed with Smith that people should only contribute to the state if they can afford to. Instead, Ricardo targeted the wealthiest class, the landowners. He believed that production and consumption taxes were the worst as they directly reduce the size of the economy. He saw taxes on wages and profits as a tax on consumption as it would only lead to higher prices. Instead he saw taxes on rent, gold and ground rent as more viable options because they would not significantly reduce the productive potential of the economy.
A less well known feature of Ricardo's writing is about technology which seems to reflect many modern issues despite being written over 200 years ago. Although Ricardo approved of the use of technology, he acknowledged there were dangers. He said technology would lead to lower employment and wages would also decline. In spite of this he recognised delaying technological developments would leave countries lagging behind internationally and that improved productivity had the potential to lower prices.
Perhaps after the theory of comparative advantage, Ricardo's theory of rent is his most famous theory. Ricardo says that rent can only be charged if land is scarce and variable in quality and that this rent is dependent on the difference in productivity for different types of land. If one type of land can produce 20 bushels of grain and another type of land can produce 40 bushels of grain, the rent will be 20 bushels of grain. If it wasn't at this level farmers would farm the land which produce the most net produce and there would be excess demand for certain types of land increasing the level of rent. Based on his theory Ricardo believed that higher progress means higher rent because more land will be farmed which means lower quality land has to be farmed which increases the rent for other types of land because rent is based on the productivity of the lowest quality land. However, this is the point where Ricardo takes a more pessimistic view of the economy to Smith. Higher rent only benefits landlords because consumers suffer from higher grain prices and producers suffer from smaller profits. In this theory Ricardo is suggesting improvement can only bring pain for producers and consumers. That is part of the reason why Ricardo vehemently opposed the Corn Laws. In the end this didn't happen because of productivity improvements in agriculture.
It is interesting to ponder whether Ricardo would have been an even greater economist if Smith had not come first or whether Smith is largely responsible for establishing the framework for Ricardo to build on. Nevertheless, it is clear Ricardo does outline some ground breaking new ideas which have put him in the history books, however, they are much more scarce compared to Smith's ideas. Ricardo is a manageable read for an insight into classical economics so I would recommend it as an alternative to Smith if that is too long for you. However, it is also clear that Ricardo is more analytical and less poetic than Smith so I still think Smith is unquestionably the father of economics based on his unique insight.
If anybody wants a summary of Principles of Political Economy and Taxation please have a look at my summary at the link below. It includes all the main points in the book yet it will save you many, many hours. https://www.tes.com/teaching-resource/principles-of-political-economy-and-tax-by-david-ricardo-summary-12031589