David Ricardo (1772-1823) was the apostle of capital accumulation. In his view, the growth of capital was the great source of economic expansion, and all economic policy should be directed toward promoting it. To prove his point, he developed a theoretical model of the economy that dominated the thinking of economists for fifty years. He believed that economic freedom led to maximum profits, that profits were the source of investment capital, and that a competitive economy would lead to profit-maximizing investments. In Ricardo's view, policies that benefited business would lead to maximum economic growth.
Born in London of Jewish parents, Ricardo married a young Quaker woman when he reached the age of twenty-one, causing a break between himself and his stockbroker father. Financed by friends, he became a trader on the London Exchange. So adept was he at the intricate and risky business of speculation that by the age of twenty-six he had amassed a large fortune. He retired to a country estate in 1814, bought an Irish pocket-borough seat in Parliament in 1819, and devoted the remaining few years of his short life to public affairs and economics. A "millionaire radical," he advocated
reforms in banking and currency, poor relief, and the tariff, and supported freedom of press and speech, as well as other reform causes. His only book on economics carries the formidable title Principles of Political Economy and Taxation. Its content is even more formidable, but it had tremendous influence in its day.
In the years around 1815, at the close of the Napoleonic wars, one of the great political and social issues in England was whether the nation should try to preserve its agriculturally based economy or become more heavily industrialized. Involved in the debate was the question of the place of the landed aristocracy in the English social and political system. The issue was fought out in Parliament over the Corn Laws, which dealt with the import of wheat into England. (The English call wheat and other grains "corn," and our corn is "Indian corn" or "maize.") English laws related to the import of wheat were intended to promote domestic agriculture without causing major increases in the price of food. When the price of wheat fell in England, tariffs were raised on imports of wheat in order to keep out the foreign grain that was depressing domestic prices and injuring the business of domestic farmers. When the price of wheat rose above a given level, import duties were reduced, thus encouraging more imports and keeping domestic prices from rising further. In short, the British government tried to keep grain prices between an upper and a lower limit by means of a sliding scale of tariffs.
Nevertheless, during the French wars the price of food rose substantially, and farmers were temporarily well off. Their production costs also rose and remained high when peace came, wartime demand slackened, and the price of food fell. Farmers began clamoring for higher duties on imported wheat, fearing that they faced ruin unless protected by enforcement of the Corn Laws. The landowner's point of view was reinforced by arguments that a sound agriculture was necessary for England's national defense and for the preservation of the old traditions and national vigor. There was a revival of the physiocratic doctrine that economic growth depended on the natural productivity of the soil. Pamphlets appeared, such as one entitled England Independent of Commerce, which argued for the protection and preservation of agricultural interests.
Business interests, on the other hand, opposed tariff increases, which, they declared, would raise food prices and force wages upward. The result would be reduced profits, decreased exports of manufactured products, and ruin for English industry. Business interests argued that England's future lay with industrial expansion, not with agriculture, and they demanded outright repeal of the Corn Laws.
This was the state of the issue when Ricardo and other economists entered the debate over Corn Law policy. Ricardo was on the business side of the argument. He believed that landowners, not farmers, would be the chief beneficiaries if the price of wheat in England was raised by a higher tariff. The high price of wheat would enable cultivation to be extended to areas that would otherwise be unprofitable. In older wheat-growing areas, rents would be raised to take advantage of the higher prices farmers were receiving. A larger proportion of the total national income would then flow into
the hands of landowners, and this parasitic group would use its increased wealth for luxury expenditures such as servants and country houses, not for productive investment.
In addition, the enlarged cultivation of land would draw capital and labor away from industry and distort the whole production pattern of the country. Artificially high food prices would lead to a misallocation of productive resources into agriculture and out of manufacturing, thereby hindering the nation's natural development of industry.
Ricardo also pointed out that high prices for food would require high wage rates and high costs of production in manufacturing. Since England had to sell its manufactures throughout the world, competing with the products of other countries, higher costs in English industry would result in reduced business for English exports and a reduced level of output for English manufacturers. Profits would also be reduced, and there would be a slower pace of capital accumulation and economic expansion, due to the lack of both incentive and funds to invest.
This was Ricardo's indictment of the Corn Laws (although he did not advocate their complete repeal). It supported the business position on the issue with a theoretical model of the economy that gave substance and validity to his policy conclusions. Ricardo's theory was more than a treatment of a contemporary policy problem. If that were all it had been, it would have died as interest in the problem died. But Ricardo took it much further and generalized it into a comprehensive theory of economic growth.
In the early stages of a nation's growth, he argued, the population would be small and only a portion of the land would be cultivated. Under these conditions the rent paid to landowners would be a relatively small proportion, and profits a large proportion, of the total national income. The profits, plowed back into industrial development, would result in a greater demand for labor, which—following Malthus—would cause population to grow while wages remained at the subsistence level. The growth in population would require an extension of the cultivated area in order to provide larger amounts of food. This extension could be accomplished only by raising food prices to cover the higher costs of production incurred by bringing less fertile lands into cultivation. The higher price of food would enable landowners to raise the rents charged on the older cultivated lands, because the higher food prices charged could bear higher rents. At the same time, the higher cost of food would force employers to pay higher money wages in order to maintain wage rates at the subsistence level. This in turn would raise the cost of manufactured goods and thereby reduce the profits obtained by manufacturers. The reduced profits would then leave less wealth available for expansion and would also reduce incentives to invest. Ricardo envisaged that this process of economic growth would continue, with capital accumulation and growth gradually slowing down, until growth halted after many decades of expansion. At this stage of development the population would be large, cultivation extended, industry developed, production high—but savings and capital accumulation would be adequate only for replacement of capital, not for further expansion.
The picture Ricardo drew was one in which the economy, if left alone, would achieve the maximum growth possible. To that end, business would have to be freed of all restrictions that might reduce ability to maximize profits, so that the maximum amount of saving and capital accumulation could take place. Government intervention in the economy would lead to a lower rather than a higher level of economic activity. Right or wrong, the theory was on the side of the coming rulers of the social order—business interests—and this in itself ensured it long life.