David Ricardo

A producer should specialise in what it gives up least to make, not in what it makes most efficiently.

It shows both sides gain from trade even when one side is more productive at everything. What matters is the difference in relative costs, not in absolute costs. It is arguably the least intuitive and most robust result in economics.

On the Principles of Political Economy and Taxation (1817), ch. 7

Being able to produce a good with fewer resources than someone else.

Adam Smith's case for trade rested on it. Ricardo showed it is neither necessary nor sufficient. Portugal can be better at both cloth and wine and still gain by buying cloth from England.

The Wealth of Nations (1776); contrasted in Principles (1817)

The real cost of anything is the next-best thing given up to get it.

An hour of a lawyer's typing costs her an hour of fees, however fast she types. Seeing costs as forgone alternatives is what makes comparative advantage click, and it applies to people and firms as much as to nations.

The menu of output combinations a country can reach with its labour and technology.

Without trade, a country can only consume on or inside its own frontier. Specialisation plus trade lets both countries consume outside their frontiers, and that is the gain from trade drawn as a picture.

The rate at which one country's exports exchange for its imports.

Both countries gain only if the price lies between their two domestic opportunity costs. Where in that band it settles decides how the gain is split, but not whether there is one.

Ricardo's view that goods exchange, within a country, roughly in proportion to the labour needed to make them.

It gave him a simple yardstick for his models. Its limits show up in his trade theory: across borders, labour does not move, so prices are not set by labour content. Later economists replaced it with marginal utility and opportunity cost, and Marx took it in another direction.

On the Principles of Political Economy and Taxation (1817), ch. 1

With many goods, rank them by relative labour cost; relative wages decide where the chain is cut between the two countries.

It turns the two-good example into a general rule. A less productive country still exports something by paying lower wages, so trade does not require being good at anything in absolute terms. This answers the 'pauper labour' fear in both directions.

Dornbusch, Fischer & Samuelson (1977), extending Ricardo

Rent is the surplus a better plot of land yields over the worst plot in use.

As population grows, worse land is farmed, the price of corn rises to cover its costs, and the owners of better land collect the difference. In Ricardo's words, corn is not high because rent is paid; rent is paid because corn is high.

On the Principles of Political Economy and Taxation (1817), ch. 2

The worst land worth farming at current prices, which pays no rent.

The cost of producing corn on the marginal plot sets the price for all corn. Marginal reasoning of this kind became the core method of economics after the 1870s.

Adding more labour and capital to a fixed amount of land yields smaller and smaller increments of output.

It drives both rent theory and the Malthusian trap. It holds for any fixed factor, holding technology constant, which is the assumption that later history broke.

British tariffs and import bans on grain, 1815–1846.

Ricardo argued they forced cultivation of poor land, raised the price of bread and rents, and squeezed profits, the source of investment and growth. Their repeal in 1846 became the symbol of the free-trade era.

Essay on the Influence of a Low Price of Corn on the Profits of Stock (1815)

Ricardo's theory of distribution: the national product splits into rent for landlords, wages for workers and profits for capitalists.

If wages must buy a subsistence basket of corn, dearer corn raises money wages and lowers profits. In Ricardo's account, landlords' interests ran against everyone else's: rising rents came out of profits and growth.

On the Principles of Political Economy and Taxation (1817), ch. 5–6

The end point where profits fall so low that accumulation, and therefore growth, stops.

With diminishing returns on land and wages at subsistence, Ricardo expected profits to trend down. Free trade in corn and better farming could postpone it. Sustained technological progress turned out to prevent it altogether.

Malthus's claim that population tends to grow faster than the food supply, so it is held back by misery or 'moral restraint'.

It describes most of human history fairly well: gains in productivity became more people rather than higher living standards. It failed as a forecast after about 1800, when technology outran population and fertility fell as people grew richer.

Thomas Malthus, An Essay on the Principle of Population (1798)

A loop in which any rise in income above subsistence raises population until income is pushed back down.

Escaping it needs technology to grow faster than population can keep up with. Fertility that falls as income rises makes the escape far easier and lasting, and in practice the two came together.

If households fully anticipate the future taxes needed to repay government debt, borrowing and taxing have the same effect on spending.

It challenges the idea that deficits stimulate demand. Ricardo set out the logic in his Essay on the Funding System (1820) but doubted that people actually behave this way. Robert Barro revived it in 1974. Most evidence finds partial, not full, equivalence.

Essay on the Funding System (1820)

When each country produces what it is comparatively good at, world output of every good can rise with the same labour.

Trade is not a zero-sum contest for market share. It is a way of producing more with what exists. The gain comes from imports, which are what a country gets for its exports.