Law of Comparative Advantage

David Ricardo's genius was illustrated in both the practical world of affairs and in the realm of ideas. Disinherited by his wealthy Jewish father for marrying a Quaker at the age of 21, Ricardo and his bride joined the Unitarian church, which at the time was viewed as a radical sect. Ricardo successfully pursued a career as a stockjobber and then as a loan contractor, and when he was forty-two, his accumulated wealth permitted him to retire from business. Bored with the idle life, he turned his attention to politics and intellectual pursuits. After a hesitant beginning as a writer on economic subjects, Ricardo etched his name on the pages of history by publishing a treatise, On the Principles of Political Economy and Taxation. He was not an accomplished writer, having a heavy-handed, obscure, and abstract style. Nevertheless, the force of his logic almost immediately attracted a close-knit band of gifted if dogmatic disciples. Ricardo's appeal was based on his ability to cast a wide assortment of serious problems into simple analytical models that considered only a few strategic variables but yielded sweeping conclusions of a very practical nature. One example of Ricardo's penetrating insight concerns the doctrine of comparative costs. Earlier economists had taught that it pays a country to concentrate on the production of those goods it can produce using fewer resources than any other country and to import those goods that can be produced abroad using fewer resources. Ricardo developed the following not-so-obvious implication of this doctrine: under free trade, not all goods are necessarily produced in countries where their absolute production cost (in terms of resources) is lowest. He demonstrated that it could pay a country to import something, even though it could produce the same product with fewer resources at home. Ricardo's demonstration rests on the idea of relative efficiency, or comparative costs. Ricardo's principle is developed in greater detail in the Economics Interactive module on international trade, but it is important to note that the core of all free trade arguments harks back to this Ricardian concept. Ricardo's discussion of land rent and his analysis of taxation were also trailblazing works that place modern economists forever in his debt.