David Ricardo's Discovery of Comparative Advantage

There's place and means for every man alive.

—William Shakespeare, All's Well That Ends Well

David Ricardo (1772–1823) probably discovered the law of comparative advantage around the first two weeks of October 1816. The date itself is not important, but his letters at the time reveal how Ricardo's mind worked when he discovered the law. If my hypothesis is correct, the letters show that his mind ranged over much of the terrain of trade theory—from factor price equalization conditions to the Ricardian model. I also conjecture that the hard part of his discovery was coming up with the key assumption of factor immobility. The logical nature of his proof is reexamined. Given the importance of comparative advantage, how it was discovered may give economists some insight into the process of highly creative thinking.

When asked to name a law of economics that is both true and nontrivial, Paul Samuelson named Ricardo's law of comparative advantage. Historians of the law of comparative advantage have turned a relatively simple and beautiful story into a confused tangle of claims of priority, error, incompleteness, and attribution. It has been said that Robert Torrens (1780–1864) deserves the credit for discovering the law; James Mill (1773–1836) gave the theory to Ricardo; Ricardo had no interest in the law after it appeared; and Ricardo's exposition is deeply incomplete.¹ Perhaps conflicting claims are to be expected, given the importance of comparative advantage. It may be the single best illustration of the power of economic analysis to defeat the forces of foolishness.

Joseph Schumpeter (1954, 4–5) gave four reasons to study the history of economic thought: for direction, inspiration, insight, and economic methodology. Learning about how Ricardo discovered the law might fit into all of those categories. Moreover, in view of the importance of attribution in the creation of incentives for the future growth of any science, a historical reexamination of the law of comparative advantage may be useful. As Sherwin Rosen (1993) has said in a novel defense of the history of economic thought as an academic discipline, “Comparisons with the past help to set and maintain standards of accomplishment in a profession.” Thus we need to add Rosen's “professional incentives” to Schumpeter's list.

As a trade theorist, it is with some trepidation that I dispute the conclusions of scholars in the broader area that is the history of economic thought. But without their scholarly and plausible claims, I would not have had the pleasure of examining when Ricardo discovered comparative advantage. Vilfredo Pareto once said, “Give me an error any time, full of seeds, bursting with its own corrections. You can keep your sterile truth for yourself.”

The first section of this essay briefly restates the Ricardian law of comparative advantage, because it will be convenient to have a compact statement before us in our historical journey. In order to indicate the difficulties in the way of discovering comparative advantage, the next section uses a counterfactual to show that Torrens should not get credit for the law of comparative advantage. In the third section I defend my inference that Ricardo discovered comparative advantage around the first two weeks of October 1816 and show the difference between Ricardo's statement and modern interpretations. The fourth section is devoted to Ricardo's other contributions to trade theory. A final section contains some concluding thoughts.

Ricardo's Law of Comparative Advantage:
A Modern Statement

It is important to begin with a modern statement of Ricardo's law of comparative advantage to fully appreciate Ricardo's own statement and, perhaps, to also understand why some confusion has existed over the nature of his proof. This section fits the definition of a rational reconstruction of Ricardo (Blaug 1999) because, as we shall see later, Ricardo's own exposition was quite different, leading modern interpreters into unjustified claims of logical incompleteness.

Consider two countries, home and...