On the Principles of Political Economy and Taxation

Contents

1. Original Preface 4 min 8

   Ricardo’s preface of 1817. The produce of the earth is divided among three classes, landlords, capitalists and labourers, as rent, profit and wages, and the shares change as society develops. To find the laws of this distribution is the principal problem of political economy. Smith and his successors failed because they did not understand rent, which Malthus and West explained in 1815. Ricardo admires Smith and Say, but will criticise both freely where he disagrees.

2. Advertisement to the Third Edition 2 min 3

   Ricardo’s note to the third edition, dated 26 March 1821. He has enlarged the first chapter on value, added a new chapter on machinery and its effects on the different classes, answered Say’s amended views on value and riches, and strengthened his argument that a country’s ability to pay taxes depends on each person’s money income compared with the prices of what they consume, which bears on free trade in corn for a country carrying a huge National Debt.

3. I On Value 1 h 15 min 32

   The value of a reproducible commodity depends on the relative quantity of labour needed to produce it, including the labour embodied in tools and machines, not on the wages paid for that labour. Ricardo rejects Smith’s alternative measures, corn and labour commanded. A rise in wages lowers profits but leaves relative values unchanged, except where capitals differ in their proportion of fixed capital, durability or time to market; then a rise in wages lowers the relative price of goods made with much durable capital. These effects are small. No invariable measure of value exists, but gold may be supposed to be one.

4. II On Rent 29 min 21

   Rent is the payment for the original and indestructible powers of the soil. It arises only because land is limited and unequal in quality: as population grows, poorer land or less productive doses of capital are brought into use, the price of corn rises to the cost on the worst land, and the better land yields a rent equal to the difference. Corn is not high because rent is paid; rent is paid because corn is high, so rent forms no part of price. Agricultural improvements lower rent, and landlords gain doubly from growing scarcity.

5. III On the Rent of Mines 5 min 3

   Mines pay rent on the same principle as land. The poorest mine worked pays no rent and determines the value of the metal; richer mines pay the difference to their owners. The value of gold and silver varies like that of any commodity, with improvements in mining and the discovery of new mines, but more slowly than most. Ricardo will continue to treat gold as an invariable measure of value.

6. IV On Natural and Market Price 9 min 4

   Market prices deviate from natural prices through accidental changes in supply and demand, but capitalists’ search for the highest profit moves capital, largely through bankers and lenders, from less to more profitable trades until market prices return to their natural level and profit rates are equalised, allowing for differences in risk or comfort. The disruption after the end of the war is a temporary exception.

7. V On Wages 28 min 16

   Labour has a natural price, the wage that lets workers subsist and keep their numbers constant, and a market price set by supply and demand, which tends back to it. The natural wage depends on the price of food and necessaries, and on the habits and customs of the people. As society advances and food becomes dearer, money wages rise while corn wages fall, and the labourer’s condition worsens while the landlord’s improves. Wages should be left to free competition, and the Poor Laws, which encourage population and threaten to absorb the whole net revenue, should be gradually abolished.

8. VI On Profits 36 min 15

   On land that pays no rent, the whole value of the produce is divided between wages and profits, so profits fall whenever wages rise. As population grows and worse land is cultivated, corn becomes dearer, money wages rise, and the rate of profit falls in agriculture and manufacture alike, while landlords alone gain. The tendency is checked from time to time by improvements in agriculture and machinery. Pushed to its limit, it would end accumulation and growth, the stationary state. A fertile country that imports food freely can accumulate long without much fall in profits.

9. VII On Foreign Trade 46 min 17

   Foreign trade increases the mass of commodities but not the amount of value, and raises profits only if it cheapens the necessaries on which wages are spent. Because capital and labour do not move freely between countries, goods are not exchanged at equal quantities of labour. England, needing 100 men for cloth and 120 for wine, and Portugal, needing 90 and 80, both gain if each specialises: the principle of comparative advantage. Gold and silver distribute themselves among countries to fit this natural barter trade, and the chapter ends with the exchanges and the wartime depreciation of English paper money.

10. VIII On Taxes 9 min 6

    Taxes are paid either from a country’s revenue or from its capital. Despite twenty years of enormous wartime spending, Britain’s production grew faster than its taxes, though it would have grown faster still without them. All taxes lessen the power to accumulate. Governments should avoid taxes that fall on capital, such as duties on legacies and on the transfer of property, which also hinder capital from passing to those who would use it best.

11. IX Taxes on Raw Produce 33 min 9

    A tax on raw produce raises the price of corn by the whole tax, so it is paid by consumers, not by landlords or farmers, and money rents stay the same. Since workers cannot bear it, wages rise and profits fall. Ricardo answers four objections: that it is unequal (tax rent and dividends directly), that wages lag behind prices (they do not, for a tax or a fall in the value of money, unlike a bad harvest), that it discourages accumulation (no more than other taxes), and that it hurts exports (money flows restore the balance of trade).

12. X Taxes on Rent 5 min 2

    A tax on rent, strictly understood as payment for the land alone, falls wholly on landlords: it cannot raise the price of corn, which is set on the land that pays no rent, and it does not discourage cultivation. But what is commonly called rent also includes a return on the landlord’s buildings and improvements, and the part of a tax that falls on this capital would be passed on to consumers.

13. XI Tithes 9 min 5

    Tithes, a tenth of the gross produce paid to the church, fall on the consumer of corn, not on the landlord, because the worst land pays them too. Unlike a fixed money tax, they grow with the difficulty of producing corn, taking an ever larger share of the net produce as cultivation extends. Because they tax home corn but not foreign, they act as a bounty on importation, which Ricardo would correct by an equal duty on imported corn paid to the state.

14. XII Land-Tax 19 min 4

    A land-tax proportioned to rent is a tax on rent and falls on landlords; a fixed tax per acre on all cultivated land raises the price of corn and gives the owners of better land an extra gain, breaching Smith’s fourth maxim of taxation. Against Smith, Ricardo argues that taxes on the land and its produce are paid by consumers, not deducted from rent. He then corrects Say on the English land-tax and on taxes levied in kind.

15. XIII Taxes on Gold 18 min 3

    A tax on gold cannot raise its value until its quantity is reduced, which takes long because gold is durable and the demand for money depends on its value. Until then holders of money bear the tax. If a single country owned all the mines, as Ricardo imagines of the King of Spain, a heavy tax on gold would let it obtain the same imports with far less capital, while the world circulated a smaller quantity of more valuable money.

16. XIV Taxes on Houses 8 min 3

    Taxes on houses, like those on gold, fall partly on owners, because the supply of houses cannot be quickly reduced. Following Smith, Ricardo divides house rent into building rent, which must yield normal profit and so recovers in time, and ground rent, which bears the lasting share. He rejects Smith’s view that ground rents should be singled out for taxation as unjust to those who bought land with their savings.

17. XV Taxes on Profits 21 min 5

    A tax on the profits of one trade raises the price of its goods; a tax on all profits would raise all prices if the money metal were produced at home and untaxed. Because capitals differ in durability, such a tax alters relative prices, which Ricardo thinks explains why prices moved unevenly during the Bank Restriction. Landlords escape a tax on farmers’ profits, and, since money is imported, a general tax on profits would in the end leave prices unchanged.

18. XVI Taxes on Wages 55 min 12

    Taxes on wages raise wages and so fall on profits. Ricardo defends Smith’s view that wages rise with a tax against Buchanan, using Malthus’s image of wages as a political barometer, but rejects Smith’s claim that such taxes fall on landlords and raise manufactured prices. A general rise of prices does no harm to trade, since the exchanges adjust. He criticises Decker and Say, and discusses taxes on luxuries and the income tax.

19. XVII Taxes on Other Commodities than Raw Produce 26 min 12

    A tax on any commodity raises its price. Ricardo turns to war finance: the real cost of a war is what it spends, whether met by taxes or loans, and the interest on the national debt is a transfer between citizens. Yet borrowing makes nations less thrifty, the sinking fund is illusory, and a property levy to pay off the debt would be wise. He then distinguishes true monopoly prices from the price of corn, against Buchanan and Say.

20. XVIII Poor Rates 10 min 3

    The poor rate, levied on the annual value of property occupied, falls partly on profits, partly on consumers of raw produce and partly on rent, according to circumstances. Because farmers are rated on the produce of their improved land while manufacturers are rated only on their buildings, it presses peculiarly on agriculture, raising the price of corn in a growing country and falling on landlords in a stationary or declining one.

21. XIX On Sudden Changes in the Channels of Trade 16 min 9

    Sudden changes in trade, as at the start of a war or of peace, cause real distress while capital and labour move between employments, especially in rich countries with much fixed capital. Such distress is not a sign of national decline. When peace reopens imports of cheap corn, a temporary duty declining year by year would let farmers withdraw gradually; but prohibiting imports to protect sunk capital is like forbidding better machinery.

22. XX Value and Riches, Their Distinctive Properties 27 min 10

    Riches, the necessaries and enjoyments a nation commands, differ from value, which depends on the labour needed to produce them: improvements increase riches while lowering value. No commodity is an invariable measure of value. Ricardo rejects Lauderdale’s paradox of water, criticises Say for confusing value, riches and utility, sets Say’s statements against one another, and agrees with Destutt de Tracy that labour is the common measure, while natural agents add only to value in use.

23. XXI Effects of Accumulation on Profits and Interest 20 min 9

    Accumulation does not lower profits unless wages rise because food becomes harder to produce. Accepting Say’s argument that demand is limited only by production, Ricardo denies that capital can be in general surplus: desires are unlimited, and a glut of everything is possible only if all saving went into necessaries. He corrects Smith on the carrying trade and examines the market and legal rates of interest and the price of government stock.

24. XXII Bounties on Exportation, and Prohibitions of Importation 37 min 12

    A bounty on exporting corn lowers its price abroad but, once more capital has moved to the land, not at home; nor does it raise wages and all other prices, as Adam Smith and the Edinburgh Review supposed, since higher wages come out of profits. Because extra demand drives cultivation onto worse land, landlords gain permanently from bounties and import prohibitions, while manufacturers gain only for a time. Such measures misallocate capital and waste part of what they take; Ricardo calls for a gradual return to universal free trade.

25. XXIII On Bounties on Production 10 min 3

    A tax on commodities used to fund a bounty on growing corn, or the reverse, only shifts relative prices: one class gains what another pays, and no more is produced. Capitalists may get a higher rate of profit without being better off, unlike when corn becomes cheaper through real improvements. In an isolated country the measure is pointless; with foreign trade it would distort the pattern of exports and imports to the country’s loss.

26. XXIV Doctrine of Adam Smith Concerning the Rent of Land 23 min 4

    Ricardo shows that Smith’s own account of coal mines, where the least productive mine in use pays no rent and governs price, holds equally for land. Smith was therefore wrong to treat rent as a component of price, or to think food always yields a rent. Cheaper staple foods such as potatoes would first lower rents, then raise them as population grew. The landlord’s interest in dear corn is always opposed to that of consumers and manufacturers.

27. XXV On Colonial Trade 17 min 4

    Smith proved that colonial monopolies injure colonies, but not that they always injure the mother country, which can gain at the colony’s expense, much as a favoured nation gains from a commercial treaty. Restrictions change trade by redistributing the precious metals and so altering money prices. Against Smith, Ricardo denies that the colony trade raised the general rate of profit or that high profits raise prices; the real cost is a worse distribution of capital.

28. XXVI On Gross and Net Revenue 8 min 9

    Against Smith’s preference for employments that set the most labour in motion, Ricardo argues that a nation’s strength lies in its net revenue, rent and profit, since only that can be taxed or saved: it does not matter whether ten or twelve million people are employed if net revenue is the same. He also rejects Smith’s claim that home trade employs twice as much British labour as foreign trade.

29. XXVII On Currency and Banks 39 min 14

    Money’s value rests on the labour cost of gold but also on its quantity, so paper money can circulate at full value if its issue is limited. Ricardo restates his 1816 plan: the Bank should pay its notes in gold bullion at the Mint price, giving a cheap paper currency with a gold standard. He blames the 1797 suspension on panic, argues that the state rather than a private bank should profit from issuing paper, managed by independent commissioners, and explains the history of the two-metal coinage and the gold standard of 1816.

30. XXVIII On the Comparative Value of Gold, Corn, and Labour, in Rich and Poor Countries 13 min 2

    Smith held that gold buys more corn and labour in rich countries than in poor ones, and is cheaper where the mines are. Ricardo replies that in rich countries food is dear because of the difficulty of producing it, that the natural price of the exporting country governs corn prices once trade is free, and that statements about the value of gold mean nothing unless the commodity measuring it is named.

31. XXIX Taxes Paid by the Producer 5 min 2

    Say and Sismondi argued that a tax levied early in production is multiplied for the consumer, since each manufacturer adds profit on the tax he has advanced. Ricardo accepts that it burdens small manufacturers but denies any national loss: the extra charge is only interest for the time the tax is advanced, which the consumer gains back by paying later.

32. XXX On the Influence of Demand and Supply on Prices 7 min 5

    Supply and demand affect market prices only temporarily; the cost of production regulates prices in the long run. Ricardo attacks the opposite view of Say, Buchanan and Lord Lauderdale, which he says has caused much error. Their law that prices follow the proportion of supply to demand holds only for monopolised goods, whose quantity cannot be increased; competitive goods fall to their new natural price however much demand grows.

33. XXXI On Machinery 23 min 15

    Ricardo retracts his earlier view that machinery benefits every class. A machine can raise net revenue while reducing gross produce, the fund that maintains labour, making part of the population redundant: the workers’ belief that machinery harms them is correct political economy. Spending on servants or war employs more people than spending on luxuries. Yet machinery should not be discouraged: it is introduced gradually as wages rise, savings from higher profits re-employ labour, and capital denied machinery at home will go abroad.

34. XXXII Mr. Malthus’s Opinions on Rent 55 min 23

    Ricardo praises Malthus on population and rent but disputes his views. Rent creates value but not wealth: it transfers income to landlords. Rent rises with the relative scarcity of good land, not with fertility or abundance, and agricultural improvements lower it at first. Population grows because capital and wages grow, not because food creates its own demand. A fall in the price of corn would not reduce the nation’s taxable income in proportion, as Malthus feared, and importing cheap corn increases wealth even though rents fall.