Text 14: david ricardo (1772-1823) Classical Champion of Free Trade

David Ricardo is one of history's most influential economists.

Born in England, Ricardo made a fortune on the London Stock Exchange. This wealth gave him the time to write and to serve in Parliament's House of Commons. His most famous work, Principles of Political Economy and Taxation (1817), marked him as the greatest spokesman for classical economics since Adam Smith.

Ricardo is especially famous in international economics for demonstrating the advantages of free trade. Free trade is a policy in which tariffs and other barriers to trade between nations are removed. To prove his point, Ricardo developed a concept we now call the principle of comparative advantage. Comparative advantage enabled him to demonstrate that one nation might profitably import goods from another even though the importing country could produce that item for less than the exporter.

Ricardo's explanation of comparative advantage went as follows:

Portugal and England, both of whom produce wine and cloth, are considering the advantages of exchanging those products with one another.

Let's assume that:

• x barrels of wine are equal to (and therefore trade evenly for) y yards of cloth.

• In Portugal 80 workers can produce x barrels of wine in a year. It takes 120 English workers to produce that many barrels.

• 90 Portuguese workers can produce y yards of cloth in a year. It takes 100 English workers to produce y yards of cloth.

We can see, Ricardo continued, that even though Portugal can produce both wine and cloth more efficiently than England, it pays them to specialize in the production of wine and import English cloth. This is so because by trading with England, Portugal can obtain as much cloth for 80 worker-years as it would take 90 worker-years to produce themselves.

England will also benefit. By specializing in cloth, it will be able to obtain wine in exchange for 100 worker-years of labor rather than 120.

As a member of Parliament, Ricardo pressed the government to abandon its traditional policy of protection. Though he did not live to achieve that goal, his efforts bore fruit in the 1840s when England became the first industrial power to adopt a policy of free trade. There followed 70 years of economic growth during which the nation became the world's wealthiest industrial power.

Text 15: alfred marshall (1842-1924) Price Theory Pioneer

His textbook Principles of Economics (1890), and the doctrines that it discussed, became the standard for the teaching of that subject until well into the 1940"s. Marshall spent most of his adult life as a professor of economics at Cambridge University. His most famous pupil, John Maynard Keynes, described Marshall as «the greatest economist of the 19th century.» Interestingly, Keynes went on to become the most influential economist of the 20^th century.

Marshall is best known for the order that he made out of the theories of the earlier «classical economists» like Adam Smith, David Ricardo and John Stuart Mill. («Classical» is the name given by modern economists to the theories of those whose views were most widely held during the 75 years following the publication of The Wealth of Nations.) Despite the passage of 100 years since the publication of his Principles, his analysis of market forces is still relied upon to explain economic events.

In Marshall's world, economic events could be explained in terms of the equilibrium market price resulting from the interaction of supply and demand. One of Marshall's lasting contributions was differentiating between supply and demand in the short run and the long run. Comparing the two forces to the blades of a scissors, he argued that neither could function without the other. But, just as (depending on how the scissors is held) one blade can be more active than the other, so supply and demand vary in importance in the long and short run. In the short run, the quantity of available goods is more or less fixed (because crops have been planted, production schedules set, etc.). Therefore it is the demand for those items that will be most influential in determining their price. In the long run, he went on, the opposite is true. Both farmers and businesses can add to or reduce their production facilities as the needs dictate. In that way the supply side of the market becomes most influential in determining price.