On the Principles of Political Economy and Taxation (19 April 1817), by David Ricardo, is a pioneering book for the establishment of economics as a scientific discipline.
Ricardo analyzed the laws determining the distribution of everything that could be produced by the “three classes of the community”—namely, the landlords, the workers, and the owners of capital. As part of his theory of distribution, he concluded that profits vary inversely with wages, which rise or fall in line with the cost of necessities. Ricardo also determined that rent tends to increase as population grows, owing to the higher costs of cultivating more food for the larger population. He supposed that there was little tendency to unemployment, but he remained guarded against rapid population growth that could depress wages to the subsistence level, which would thereby limit both profits and capital formation by extending the margin of cultivation.
On foreign trade, Ricardo set forth his theory of comparative advantage. Using his famous example of two nations (Portugal and England) and two commodities (wine and cloth), Ricardo argued that trade would be beneficial even if Portugal held an absolute cost advantage over England in both commodities. Ricardo’s argument was that there are gains from trade if each nation specializes completely in the production of the good in which it has a ‘comparative’ cost advantage in producing, and then trades with the other nation for the other good. Notice that the differences in initial position mean that the labor theory of value is not assumed to hold across countries — as it should be, Ricardo argued, because factors, particularly labor, are not generally mobile across borders. As far as growth is concerned, foreign trade may promote further accumulation and growth if wage goods (not luxuries) are imported at a lower price than they cost domestically — thereby leading to a lowering of the real wage and a rise in profits. But the main effect, Ricardo noted, is that overall income levels would rise in both nations regardless.
Although he built in part upon the work of Smith, he defined the scope of economics more narrowly than had Smith and included little explicit social philosophy.