Borderless trade is scary, especially in wealthy countries. In October 2015, at least 150,000 people took part in a large-scale demonstration in Berlin against TTIP and Ceta, the EU’s planned free trade agreements with the USA and Canada. That was significantly more demonstrators than those who took to the streets in March 2022 in solidarity with Ukraine. It was said at the time that TTIP and Ceta would endanger the environment, workers’ rights and even democracy. The protests have now achieved their goal: Donald Trump, who is no friend of free trade anyway, has long since put an end to TTIP.
There was also resistance to free trade in England more than 200 years ago. In 1815 it was large landowners who wanted to “protect” the British Isles from cheap grain from abroad and thus increase their income. The result was the infamous “Corn Laws,” which sealed off the market and made bread expensive. Middle classes and workers in particular suffered from the high prices, which led to violent protests. On August 16, 1819, tens of thousands of people took part in a demonstration near Manchester for free trade and against the Corn Laws. Soldiers broke up the rally in a bloody excess, killing 15 people. The incident went down in history as the “Peterloo Massacre”. It was not until 1846 that Parliament in London abolished the infamous laws.
The Corn Laws were an inglorious episode in the history of England. However, they were to be of central importance for the development of economics, because modern foreign trade theory arose from dealing with them. And it mainly has to do with one man: David Ricardo. The economist, who was born in London 250 years ago, fought passionately against the law and developed a theory that founded this fight and which, in principle, still applies today.
Ricardo, one of the classics of economics alongside Adam Smith and Thomas Malthus, showed that foreign trade is advantageous for a country even if all goods could be produced domestically more cheaply. In his famous example, he explained this using the greatly simplified example of trade between England and Portugal: Both countries can produce wine and clothing. Portugal is cheaper than England for both goods, but the advantage for wine is much larger than for clothes. Therefore, Portugal should specialize in wine, England in clothing, then both will benefit. The Nobel Prize winner Paul Samuelson later generalized this “theory of comparative advantages” in his textbook: “If each of two countries specializes in the production of those goods for which it has the greatest relative efficiency, then trade is worthwhile for everyone involved. Real wages are rising in both countries.” It is the doctrine of the advantages of the division of labor, thought through to the end.
In 1815 he was able to retire from the business
David Ricardo was born on April 18, 1772 in London. His parents were Sephardic Jews from Amsterdam, whose ancestors had been expelled from Portugal by the Inquisition in the 16th century. Ricardo’s father, Abraham Israel, had moved to London with the family shortly before David was born and worked as a broker on the stock exchange. At the age of 14, David accompanied his father and learned the securities business from scratch. When he was 21, however, the family split. The young man married Priscilla Anne Wilkinson, a Quaker, and converted himself to the Unitarians, a Protestant free church. The father disinherited him, which is why David had to stand on his own feet immediately. He quickly became an unusually successful stock trader. John Henderson, author of a major Ricardo biography, suggests that Ricardo’s accomplishment “is largely to do with the fact that he grew up in a Jewish enclave rather than in mainstream English society. As an outsider, he was able to pull through the veil of custom and tradition that covered the economic and social system of England.”
On the stock exchange, Ricardo earned his money primarily by placing government bonds with investors. Because of the Napoleonic Wars, London’s financial needs were huge and the Chancellor of the Exchequer needed a trustworthy broker. According to some accounts, Ricardo anticipated the outcome of the Battle of Waterloo and, unlike most, bet on an Allied victory. However, historians now question the veracity of this story due to a lack of evidence. In any case, Ricardo was so wealthy after 1815 that he was able to withdraw from the business. He bought a country estate called Gatcombe Park in Gloucestershire and lived there with his family. Today the estate belongs to the English Crown and is the residence of Princess Anne.
Ricardo became the first Jewish Member of Parliament in 1819, representing the Portarlington constituency. As an MP, he gained a reputation as a liberal reformer. He went against the then usual purchase of parliamentary mandates (he himself had to pay for his seat). He proposed introducing a wealth tax to reduce England’s huge debt from the wars against Napoleon, but to no avail. Another suggestion made by Ricardo was only implemented in 1946: he wanted to turn the Bank of England, which was then a private company, into a normal central bank – owned by the state but independent of its decisions. Above all, he fought against the Corn Laws, without success during his lifetime.
Ricardo’s explanation of the ground rent also had a great influence
He now had time to concern himself even more with economics. Ricardo had never attended university and is said to have discovered his passion for the subject by accident when he came across a 1799 edition of Adam Smith’s Wealth of Nations. His own major work Principles of Political Economy and Taxation was published in London in 1817 and was an immediate success.
Ricardo’s ideas shaped generations of economists, some of them up to the present day. Besides the theory of comparative cost advantages, Ricardo’s explanation of ground rent had the most influence. For the classic economists, it was not at all self-evident that someone only got money for owning land and soil. They believed that only human labor could create value; Karl Marx took over his theory of value from Ricardo. The basic pension could not be explained in this way.
Ricardo’s solution was the phenomenon of scarcity. If a state had an abundance of fertile land, simply using as much land as is needed to feed the population, land would have no price. But since land is in reality scarce, poorer soils also have to be put under the plough. They yield less, require more effort and thus determine the price of grain. The owners of the best floors do not have this effort and still get the market price. The difference is the basic pension. The Austrian economist Heinz D. Kurz describes Ricardo’s innovation as follows: Adam Smith explained the ground rent as “nature’s generosity”, Ricardo recognized that the cause, on the contrary, was “nature’s avarice”.
David Ricardo was not able to enjoy life and work on his country estate for long. On September 11, 1823, he died at the age of only 51 as a result of a middle ear infection.