Major Ideas of David Ricardo Adam Smith and Karl Marx

David Ricardo

One of David Ricardo's theories is the theory of Ricardian equivalence. Under the theory of Ricardian equivalence, government budget deficits do not change the level of consumption among consumers. The theory behind this is that, no matter when the government chooses to pay for its expenditures, citizens are ultimately responsible for paying those deficits. Therefore, people will change their spending based on government expenditures, regardless of whether the government is borrowing to pay for those expenditures.

Another of David Ricardo's economic theories is the theory of comparative advantage. Under the theory of comparative advantage, a country should focus its production efforts on those items it produces best. In order to obtain items that a country finds difficult to produce, it should trade with other nations, who are, in turn, focusing their production efforts on those items they produce best. Furthermore, under the theory of comparative advantage, it may be more advantageous for country one to trade products with country two, even if country one can produce everything more cheaply than country two. In order to determine trade advantage, one looks at the ratio of the resources that go into production in various countries. A consideration of all resources, not strictly monetary resources, is necessary in order to determine the degree of difficulty in producing a particular item. A country that is able to produce an item using fewer resources than another country has an absolute advantage over the other country.

Not surprisingly, Ricardo did not believe in protectionist trade policies, which he believed would encourage countries to use their resources in an inefficient manner. For example, Ricardo opposed the corn laws, because he believed that they put money into the hands of landlords rather than those directly involved in production, which kept that money from circulating in the economy.

Adam Smith

Smith's philosophies helped separate the study of economics into its own field, so much so that Smith's theories form the foundation for classical economics. Smith was adamantly against the idea of government stockpiling money. Instead, he advocated the concept of free trade, despite popular and governmental opposition to the idea. Smith believed that increased wages would lead to increased production, which is best understood by looking at Smith's emphasis on labor's role in the economic system. Smith believed that labor was the most important resource in the economic system.

Furthermore, Smith believed in the idea of a free market, which he believed was guided by an invisible hand to produce the right amount of each product. The way the invisible hand guides the market is that prices for scarce items increase, which provides an incentive for people to produce those items. Similarly, prices for abundant items falls, which leads people out of the production of those items. Because Smith believed in the concept of a free market and how the market could naturally determine price and production, he argued against the formation of monopolies. In addition, Smith did not believe in governmental interference in the economy. He believed that government interference hindered the natural progression of economic development and created artificially high prices, which interfered with the operation of the free market. One of Smith's beliefs about the free market was that the success of the free market did not depend upon the selflessness of those involved in the market. Even if each member of the free market acted solely in their own best interests, their doing so promotes both the free market and the economy as a whole. This is because each person seeks to make the most profit, which encourages them to seek the lowest price for their own supplies, which they then sell at the going market rate. This cycle is the invisible hand that guides the free market.

Karl Marx

One foundation of Marx's economic theory was the idea that capitalism and the concept of the free market were not beneficial to a nation's economy. Another foundation of Marx's economic theory is the concept of labor. According to Marx, labor occurs when humans transform nature. Additionally, Marx posited that people transformed nature in different manners, which were determined in part by socialization and environment.