Classical Economic Thought: Ricardo and Malthus

Two other economists are usually studied alongside Adam Smith as the pillars of classical economics: David Ricardo and Thomas Robert Malthus, both writing in Britain in the early 19th century.

David Ricardo (1772–1823), in his 1817 book On the Principles of Political Economy and Taxation, extended Smith's ideas in two influential directions. First, his theory of comparative advantage showed that two countries can both gain from trading with each other even if one of them is more efficient at producing everything — what matters for trade is not who is absolutely better at producing a good, but who has the lower opportunity cost of producing it. For example, if Country A can produce both cloth and wheat more cheaply than Country B in absolute terms, but A is relatively much better at cloth and only slightly better at wheat, then A still gains by specialising in cloth and importing wheat from B, and B gains by specialising in wheat — both countries end up with more of both goods than if each tried to produce everything itself. This idea remains the core justification for free international trade even today. Second, Ricardo's theory of rent explained rent (the payment to a landowner) as arising from differences in the fertility of land: as population grows and less fertile land is brought under cultivation to feed it, the extra cost of farming that poorer land sets the market price of food, and the owners of the more fertile land earn a surplus — rent — purely because their land is more productive than the poorest land in use, without having done anything extra themselves. …