On Principles of Political economy and Taxation was written by David Ricardo in 1817. David Ricardo was one of the prominent classical economist. His ideas on political economy and taxation were extremely influential and it leads to the evolution of classical economics. This book tries to explain the foundation and development of burgueois capitalist state, market economy and relation between them. The extension of the taxation system, before and after this age, is effectively limited by the capitalists necessities and becomes the most important tool in the definition of class struggle.
David Ricardo divides his book in thirty two chapters and nearly every chapter addresses an issue which has remained at the centre of controversy for centuries since and it also includes footnotes at last. Whether refusing ideas of other authors popular at that time (Say, Smith, Malthus,Buchanan etc.) or furthering his own original ideas, Ricardo main interest is not in details of real world but to provide a really logically consistent theory.
The language of this book is modern English and it is classified as non-fiction type book. Ricardo used examples to make his point and his examples were small and illustrative. This book is not mathematical in nature but he used data to prove his points.
David Ricardo started his book where Adam Smith had left it (it is expected as his interest in political economy developed after reading Adam Smith’s Wealth of Nation (1776). He started his book with explanation of theory on value. Here he beautifully explained how value of commodity determined in an economy. He stated that it is the amount of labour embodied in commodity that determine the value of commodity. Ricardo moves here from abstract to real. According to him concept of labour embodied to labour commanded is seemless. He argued that labour embodied is a complex concept and there is no concept of absolute value everything is relative in ricardo world. He states that value is a function of effort and not price paid to the labour. He argued that value of commodity is determined by the amount of labour embodied in the production of commodity plus amount of past labour embodied in the production of tools that is now used by labour to produce a commodity. He rejects Adam Smith’s notion that a rise in the value of labor would be uniformly followed by a rise in the value of commodities; “only those commodities would rise which had less fixed capital employed upon them than the medium in which value was estimated, and that all those which had more would positively fall in value when wages rose.” (Pg. 29)
Then he spend a major portion of his book to explain cause behind evolution of rent in the economy whether right or wrong but he tries his best to explain it up to the mark. Ricardo will use rent only in narrow sense. He argued that an increasing supply of fertile land (though of less quality) will raise rents of higher quality land which will seem plausible as the book goes on, but appears to suffer from same criticism as the idea that interest rates are set by the productivity of capital. If increasing demand for food (from population growth) leads to less fertile land being employed, it will only be the result of increasing crop prices driving the price of all fertile lands up. As rents are generally a percentage of price, rents will go up in an absolute sense even if the percentage rent is unchanged (with the percentage rent impacted by the separate market of farmers seeking to rent land). He believes the lowest quality land not to generate any rent, though of course this can only occur if landowner and farmer are one in the sense that they are same person (otherwise the land won’t be lent for cultivation). He further argued that rent of landlord is proportional to produce given capital on any given farm without any reference to exchangeable value ( pg.50). But things that push us to produce on worse quality of land raises both rent and exchangeable value of commodity. Thus it doubly benefitting the landowner. He further argued that efficient cultivation leads to fall in rent as it enhance cultivation with less land. Additionally natural and accidental calamities doesn’t affect exchange value of a commodity.
After rent a major portion of book is spend on explaining theory on tax which includes tax on raw produce, tax on rent, tithes, land tax, tax on gold, tax on houses, tax on profits, tax on wages, tax on other commodities than raw produce (pg.- 104-187). In this section he ricardo tried to answer two question. First question is what determines how much tax one owe. It means if tax is imposed on interests then it lowers after tax return which makes investment less attractive and if tax is imposed on consumption then people responds to it by reducing consumption and increasing saving and investment. Second question is when tax is imposed who really pay it. Here ricardo is interested in figuring out how prices adjust with respect to taxes and what incidence of tax really means. For example ricardo argued that a tax on rent cannot raise price of raw produce because cost of raw produce is determined by cost of production of land that pays no rent and that tax is entirely paid by landowner. He was supporter of free trade and argued that by not allowing free trade in precious metal when prices of commodities are raised due to taxation or due to influx of precious metal economy prevents a part of dead stock of the society to being turned into active stock and prevent a greater quantity of industry from being employed.(pg.-166). He further points out inconsistency between Adam Smith and Mr Buchanan on tax on Malt where both Adam Smith and Mr Buchanan agree that tax on raw produce, a land tax and tithes, all fall on rent of land and not on the consumers of raw produce, shouldn’t it means that taxes on malt would fall on consumer of beer, and not on the rent on the land of the landlord, (pg.-183). On this Buchanan further argued that tax on malt would raise the price of malt but that a tax on the barley from which malt is made, would not raise the price of barley and therefore if malt is taxed the tax will be paid by the consumer and if barley is taxed it will be paid by the landlord and he will receive a diminished rent,(pg.-184). But Ricardo has direct contradiction with the opinion of Buchanan when it comes to tax on bread. Buchanan argued that ” A tax on bread will be ultimately paid ,not by a rise of price, but by a reduction of rent”,(vol.iii,p.355), on which ricardo argued that if a tax on malt would raise the price of beer then a tax on bread must also raise the price of bread.
Ricardo advocates free trade and argued that every country should produce what they produce at best according to their land, labour skill and environmental circumstances. He explained this point by providing an example of two countries England and Portugal where it might look like that England produce both cloth and wine better than Portugal, but if Portugal produces wine and England produces cloth and if both countries exchange their goods then both countries become better off than the case when both countries tries to produce both good at home. This famous law of ricardo is referred as “law of comparative advantage”. But now the question arise what determine the exchange value of commodities?, on which Ricardo argued that there is nothing like absolute exchange value. Everything is determined in terms of gold as gold is the most stable medium of exchange. Now the question arise what determine value of commodity in terms of gold?, on which ricardo argued that value of commodity in terms of gold is determined by amount of labour embodied in the production of good. Ricardo was strongly influenced by Thomas Malthus theory of Population which states that population growth is exponentially higher than increase of means of production which leads to starvation and hence decrease population.
Ricardo strongly opposed the corn law and poor rate of his time. Poor rate refers to the tax that is paid for poor law. It takes into account nature of all taxes and falls under different circumstances on consumer of raw produce and goods, on the profit of stock and on the rent of land. It is a tax which falls with peculiar weight on the profits of the farmers and therefore affecting the price of raw produce (pg.-187). The British government impose corn law to protect home production of corn against foreign taxation by means of tariffs. Ricardo argued that this tax is like tax on rent which falls entirely on landlord. Thus low rent leads to low production of corn which means higher prices which implies higher wages and thus low profit. Thus corn law eliminate accumulation of capital in the economy. Ricardo as liberal and free trade supporter further argued that corn laws and poor rates are way to tax capitalist income and it is a way to transfer their wealth to poors. It was government intention at that time to abolish class system in the society which results in just one class in the Britain i.e. the so called poor class.
Adam Smith argues that a man is rich or poor depends on the degree in which he can afford to enjoy the necessaries, conveniences, and amusement of human life. But Ricardo argued that value differs from riches because value depends not on abundance but also on the difficulty or facility of production (pg.-198). Ricardo further argued that one man may consider money as standard of value and for him nation may grow richer or poorer in proportion as the commodities of all kinds which can be exchange for more or less money. For other man money may be a convenient medium of barter and for him real measure of value be corn and he may consider a country is rich or poor according to the commodities it will exchange for more or less corn. M. Say further argue that silver is now of same value as in the reign of Louis XIV, because the same quantity of silver will buy the same quantity of corn (vol. i, p. 108). He further argued why should gold, or corn , or labour, be the the standard measure of value as compared to coals or iron. Ricardo clarifies this point by arguing that corn as well as gold may from difficulty or facility of production vary 10, 20, or 30 percent as compared to other things. He further argued that corn and gold are invariable which at all times require the same sacrifice of toil and labour to produce it, (pg. 199).
On Bounties on exportation and prohibition on imports ricardo argued that a bounty on export of corn tends to lower its price for foreign consumer while its impact on the price in home market remains unaffected. He further argued that a bounty lowers the price of British corn in the foreign market below the cost of producing corn in that country which would naturally extend the demand for british and diminish the demand for their own corn, (pg.-217). Here it seems that he was ignoring transportation cost and maybe he consider zero transportation cost that is not very clear.