David Ricardo

David Ricardo was born on or about this day in 1772. In my own training, I learned the most about Ricardo for his work in international trade and his development of the theory of comparative advantage (which really helps us understand all exchange, not just international trade). But his earlier work also discussed basic monetarism, pointing out that the higher prices in England were a result of the Bank of England's printing (and circulating) more bank notes and extending more credit. For more, see this.

And let us not forget the recently popularized concept of Ricardian Equivalence, according to which, when the gubmnt debt increases, so does personal saving as people save for the anticipated higher taxes in the future to cover the increased debt. Ricardo rejected the idea after suggesting it, and surely the US experience of the past decade must cast serious doubt on this concept as both the US gubmnt debt rose and personal savings fell (I know, one reason might have been the housing bubble, but that cannot possible have explained the lack of a perfect correlation between gubmnt debt and personal savings over the past several decades). As usual, there is a good summary and review at Wikipaedia.

Back when Ricardian Equivalence was the rage in economics, several colleagues asked me, "When the government debt increases, don't you save more in anticipation of having to pay higher taxes in the future?"

My flip response was, "No. I spend more so I won't have anything left for the gubmnt to tax in the future, but you go right ahead and save a bunch so you can cover all the taxes that will be collected from the savers, and I'll enjoy all my spending now while taxes are lower."

Note: I think so highly of David Ricardo's contributions to economics that I named one of my blog-sons after him....

Comments

[Kyle]

I'm probably looking at this the wrong way, but that seems to give people in general an awful lot of credit in terms of consumption now vs in the future. It also gives the masses alot of credit in terms of thinking of the consequences of deficit spending. I can't think of a single person who would rationalize saving in that manner, unless there is specific talk of a tax increase being discussed.