Understand in about 6 minutes
Ricardo builds a theory of how rent, profit, and wages divide the produce of a nation, with labour as the measure of value.
Idea map
Mental models
Price is set by production at the least productive land or dose of capital in use, the part that yields no rent. Everything more productive earns a surplus measured against that margin.
It gives the reader a single reference point from which to reason about prices, rent, wages, and profits together.
Two countries can both gain from trade when each specializes in the good its labour produces relatively most efficiently, even if one country is absolutely more efficient at producing both.
It separates relative cost from absolute cost and shows why specialization and exchange can benefit both parties.
A tax is not necessarily borne by the person who pays it. Ricardo traces each tax through prices, rent, wages, and profits to find the class that ultimately carries it and how it affects accumulation.
It trains the reader to ask who really bears a tax and what it does to growth, rather than judging it by its nominal target.
Summary
On the Principles of Political Economy and Taxation is a systematic argument about how a nation's wealth is shared out. Ricardo opens by naming three classes, the proprietor of land, the owner of capital, and the labourer, and declares that determining the laws which regulate the distribution of produce among them is the principal problem of the science. The rest of the book works out those laws and then applies them to taxation.
His foundation is a theory of value. Ricardo grants that utility is essential to value but denies that it measures value. For the great mass of goods that labour can multiply, exchangeable value rests on the comparative quantity of labour required to obtain them, including the labour stored in tools and capital. Scarcity alone governs only a few unreproducible goods such as rare paintings or particular wines.
On this base he builds the theory of rent. Rent is the payment for the original and indestructible powers of the soil, distinct from the profit on capital sunk into land. When population grows and inferior land, or further doses of capital on existing land, must be brought into use, the difference in productivity between the best and the worst land in cultivation becomes rent. The land that pays no rent regulates the price of corn, so for Ricardo high corn prices cause rent rather than being caused by it.
Wages and profits follow from the same margin. The natural price of labour is what lets labourers subsist and maintain their numbers, and it depends on the price of food and necessaries. As cultivation extends to poorer land, food grows dearer, the natural price of labour rises, and since the price of corn is fixed at the no-rent margin, the share left for profit falls. Ricardo presents this inverse relation between wages and profits as a tendency built into a growing economy. His chapter on foreign trade introduces the comparative case in which two countries gain by each specializing where its labour is relatively most effective, even when one could produce both goods more cheaply.
The long second half turns to taxation, testing each tax against the value and distribution theory. Taxes on raw produce, rent, profits, wages, houses, and commodities are each traced to the class that ultimately bears them and to their effect on accumulation. Ricardo's recurring concern is that taxes which fall on profits or check the accumulation of capital slow the growth on which the whole system depends, and he reads existing fiscal arrangements through this lens rather than through their stated intent.
Key concepts
Selected Quotes
To determine the laws which regulate this distribution, is the principal problem in Political Economy: much as the science has been improved by the writings of Turgot, Stuart, Smith, Say, Sismondi, and others
Rent is that portion of the produce of the earth, which is paid to the landlord for the use of the original and indestructible powers of the soil.
The natural price of labour is that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or diminution.
Source
Source text: Project Gutenberg edition of On The Principles of Political Economy, and Taxation by David Ricardo.
HTML text: https://www.gutenberg.org/cache/epub/33310/pg33310.txt
Project Gutenberg states that this ebook is for the use of anyone anywhere in the United States and most other parts of the world at no cost and with almost no restrictions whatsoever.
Project Gutenberg ebook 33310 reproduces the work from the Posner Memorial Collection; the treatise was first published in 1817.