Money, Banks and Finance in Economic Thought

The Logical Structure of David Ricardo’s Trade Theory and Its Implication: Beyond 200 Years of His Principles

Masunaga Atsushi, Chuo University

The year of 2017 was the bicentennial of David Ricardo’s On the Principles of Political Economy and Taxation (third edition, 1821; first edition, 1817; henceforth Principles). Commemorative of it, two books on his trade theory were published in 2017: Ricardo and International Trade and 200 Years of Ricardian Trade Theory. I would like to re-examine Ricardo’s trade theory in response to these two books. At the beginning of Chapter 7 ‘On Foreign Trade’ in Principles, Ricardo declared that foreign trade increases the quantity of commodities without increasing the amount of value. Then, he presented the famous numerical example of comparative advantage. Undoubtedly, the theory of comparative advantage is extremely important not only in his Principles, but also in the history of economic thought. However, to understand Ricardo’s theoretical system composed of political economy (Chapters 1 to 7) and the chapters on taxation (Chapters 8 to 18) in its own context, we must pay attention to the latter half of Chapter 7. Most scholars have explained that Ricardo’s tax analysis was based on his differential rent theory. There is no doubt on it. However, Ricardo also established the principle in the latter half of Chapter 7 that improvements in manufacturing have a tendency of falling value of money in a country. He applied this principle to his tax analysis, and argued that taxation tends to increase the value of a country’s money by discouraging the exportation of taxed commodities. Little attention has been given to this logical connection between the chapter on foreign trade and chapters on taxation. The principle established in the latter half of Chapter 7 also had an important implication on the nation’s ability to pay taxes, as developed in the final chapter ‘Mr. Malthus’s Opinions on Rent’ in his book. Regardless of whether taxes are imposed on raw produce or manufactured goods, they have a tendency of discouraging exports, increasing the value of a country’s money, and reducing the nation’s ability to pay taxes. Therefore, the final chapter of Ricardo’s Principles, similar to the chapters on taxation, was based not only on his theory of rent, but also on the principle derived from the latter half of Chapter 7.

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Keywords: David Ricardo, trade theory, tax analysis, nation’s ability to pay taxes

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