The principle that the quantity of labor bestowed on the production of commodities regulates their relative value, considerably modified by the employment of machinery and other fixed and durable capital.

In the former section we have supposed the implements and weapons necessary to kill the deer and salmon, to be equally durable, and to be the result of the same quantity of labor, and we have seen that the variations in the relative value of deer and salmon depended solely on the varying quantities of labor necessary to obtain them,—but in every state of society, the tools, implements, buildings, and machinery employed in different trades may be of various degrees of durability, and may require different portions of labor to produce them. The proportions, too, in which the capital that is to support labor, and the capital that is invested in tools, machinery and buildings, may be variously combined. This difference in the degree of durability of fixed capital, and this variety in the proportions in which the two sorts of capital may be combined, introduce another cause, besides the greater or less quantity of labor necessary to produce commodities, for the variations in their relative value—this cause is the rise or fall in the value of labor.

Gardner Summary:

Ricardo accepts the labor theory of value as a "close enough for abstract theory" explanation of relative prices, but acknowledges that it must be considered with several limitations and modifications:

• It applies only to goods that are useful - "utility is not the measure of exchangeable value, although it is absolutely essential to it" - like an off-on instead of a dimmer switch.
• It applies only to reproducible products - not to scarce items, such as Rembrandt paintings.
• It is "modified" (inaccurate) for goods that have different capital intensities ("employment of machinery")
  Project 1 - 100 workers for 2 years
  Project 2 - 200 workers for 1 year
  Do they have the same value?
• He hasn't discussed this yet, but it is labor cost at the margin that determines the price of a product. If we need to produce 1 million tons of grain to feed the population, and if it becomes increasingly costly to produce each bushel of grain, the uniform market price for all of the bushels will need to be high enough to cover the cost (measured in labor in Ricardo's theory) of producing the last bushel.

Chapter 2

On Rent

Rent is that portion of the produce of the earth, which is paid to the landlord for the use of the original and indestructible powers of the soil. It is often, however, confounded with the interest and profit of capital, and, in popular language, the term is applied to whatever is annually paid by a farmer to his landlord. . . .
     On the first settling of a country, in which there is an abundance of rich and fertile land, a very small proportion of which is required to be cultivated for the support of the actual population, or indeed can be cultivated with the capital which the population can command, there will be no rent; for no one would pay for the use of land, when there was an abundant quantity not yet appropriated, and, therefore, at the disposal of whosoever might choose to cultivate it.
     On the common principles of supply and demand, no rent could be paid for such land, for the reason stated why nothing is given for the use of air and water, or for any other of the gifts of nature which exist in boundless quantity... If all land had the same properties, if it were unlimited in quantity, and uniform in quality, no charge could be made for its use, unless where it possessed peculiar advantages of situation. It is only, then, because land is not unlimited in quantity and uniform in quality, and because in the progress of population, land of an inferior quality, or less advantageously situated, is called into cultivation, that rent is ever paid for the use of it. When in the progress of society, land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.
     When land of the third quality is taken into cultivation, rent immediately commences on the second, and it is regulated as before, by the difference in their productive powers. At the same time, the rent of the first quality will rise, for that must always be above the rent of the second, by the difference between the produce which they yield with a given quantity of capital and labor. With every step in the progress of population, which shall oblige a country to have recourse to land of a worse quality, to enable it to raise its supply of food, rent, on all the more fertile land, will rise.
     Thus suppose land - No. 1, 2, 3, - to yield, with an equal employment of capital and labor, a net produce of 100, 90, and 80 quarters of corn. In a new country, where there is an abundance of fertile land compared with the population, and where therefore it is only necessary to cultivate No. 1, the whole net produce will belong to the cultivator, and will be the profits of the stock which he advances. As soon as population had so far increased as to make it necessary to cultivate No. 2, from which ninety quarters only can be obtained after supporting the laborers, rent would commence on No. 1; for either there must be two rates of profit on agricultural capital, or ten quarters, or the value of ten quarters must be withdrawn from the produce of No. 1, for some other purpose. Whether the proprietor of the land, or any other person, cultivated No. 1, these ten quarters would equally constitute rent; for the cultivator of No. 2 would get the same result with his capital, whether he cultivated No. 1, paying ten quarters for rent, or continued to cultivate No. 2, paying no rent. In the same manner it might be shown that when No. 3 is brought into cultivation, the rent of No. 2 must be ten quarters, or the value of ten quarters, whilst the rent of No. 1 would rise to twenty quarters; for the cultivator of No. 3 would have the same profits whether he paid twenty quarters for the rent of No. 1, ten quarters for the rent of No. 2, or cultivated No. 3 free of all rent.

     It often, and, indeed, commonly happens, that before No. 2, 3, 4, or 5, or the inferior lands are cultivated, capital can be employed more productively on those lands which are already in cultivation. It may perhaps be found, that by doubling the original capital employed on No. 1, though the produce will not be doubled, will not be increased by 100 quarters, it may be increased by eighty-five quarters, and that this quantity exceeds what could be obtained by employing the same capital, on land No. 3.
     In such case, capital will be preferably employed on the old land, and will equally create a rent; for rent is always the difference between the produce obtained by the employment of two equal quantities of capital and labor...

Chapter 5

Of Wages

     Labor, like all other things which are purchased and sold, and which may be increased or diminished in quantity, has its natural and its market price. The natural price of labor is that price which is necessary to enable the laborers, one with another, to subsist and to perpetuate their race, without either increase or diminution.
     The power of the laborer to support himself, and the family which may be necessary to keep up the number of laborers, does not depend on the quantity of money which he may receive for wages, but on the quantity of food, necessaries, and conveniences become essential to him from habit, which that money will purchase. The natural price of labor, therefore, depends on the price of the food, necessaries, and conveniences required for the support of the laborer and his family. With a rise in the price of food and necessaries, the natural price of labor will rise; with the fall in their price, the natural price of labor will fall.
     With the progress of society the natural price of labor has always a tendency to rise, because one of the principal commodities by which its natural price is regulated, has a tendency to become dearer, from the greater difficulty of producing it. As, however, the improvements in agriculture, the discovery of new markets, whence provisions may be imported, may for a time counteract the tendency to a rise in the price of necessaries, and may even occasion their natural price to fall, so will the same causes produce the correspondent effects on the natural price of labor. . . .

 Chapter 6

On Profits

Hypothetical Ricardian Example

When only Land 1 is used:
       In one week, one worker produces either:
                 90 bushels of corn
             or 90 ounces of silver
If $1 is defined to be 1 ounce of silver, the labor theory of value suggests the price of corn will be $1 per bushel.

Now, suppose the subsistence wage is 10 bushels of corn, valued at $10

If Farmer 1 hires 3 workers:

Now, if Land 1 and Land 2 are both used, the price of food is determined by production costs on Land 2 (half as fertile as Land 1).

       On Land 2, in one week, one worker produces either:
                 45 bushels of corn
             or 90 ounces of silver
       Therefore, the price of corn rises to $2 per bushel

The Theory of Comparative Advantage

In the early 1950s, the mathematician/physicist, Stanislaw Ulam (a participant in the Manhattan Project that built the first nuclear weapons) challenged Nobel laureate Paul Samuelson to name one theory in all of the social sciences that is both true and nontrivial. Several years later, Samuelson responded with David Ricardo's theory of comparative advantage: "That it is logically true need not be argued before a mathematician; that is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them."

The theory appears in Chapter 7, "On Foreign Trade," of Ricardo's Principles of Political Economy and Taxation:

Under a system of perfectly free commerce, each country naturally devotes its capital and labor to such employments as are most beneficial to each... It is this principle which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England…

If Portugal had no commercial connection with other countries, instead of employing a great part of her capital and industry in the production of wines, with which she purchases for her own use the cloth and hardware of other countries, she would be obliged to devote a part of that capital to the manufacture of those commodities, which she would thus obtain probably inferior in quality as well as quantity.

The quantity of wine which she shall give in exchange for the cloth of England, is not determined by the respective quantities of labor devoted to the production of each, as it would be, if both commodities were manufactured in England, or both in Portugal.

England may be so circumstanced, that to produce the cloth may require the labor of 100 men for one year; and if she attempted to make the wine, it might require the labor of 120 men for the same time. England would therefore find it her interest to import wine, and to purchase it by the exportation of cloth.

To produce the wine in Portugal, might require only the labor of 80 men for one year, and to produce the cloth in the same country, might require the labor of 90 men for the same time. It would therefore be advantageous for her to export wine in exchange for cloth. This exchange might even take place, notwithstanding that the commodity imported by Portugal could be produced there with less labor than in England. Though she could make the cloth with the labor of 90 men, she would import it from a country where it required the labor of 100 men to produce it, because it would be advantageous to her rather to employ her capital in the production of wine, for which she would obtain more cloth from England, than she could produce by diverting a portion of her capital from the cultivation of vines to the manufacture of cloth.

Thus England would give the produce of the labor of 100 men, for the produce of the labor of 80. Such an exchange could not take place between the individuals of the same country. The labor of 100 Englishmen cannot be given for that of 80 Englishmen, but the produce of the labor of 100 Englishmen may be given for the produce of the labor of 80 Portuguese, 60 Russians, or 120 East Indians. The difference in this respect, between a single country and many, is easily accounted for, by considering the difficulty with which capital moves from one country to another, to seek a more profitable employment, and the activity with which it invariably passes from one province to another in the same country.

It would undoubtedly be advantageous to the capitalists of England, and to the consumers in both countries, that under such circumstances, the wine and the cloth should both be made in Portugal, and therefore that the capital and labour of England employed in making cloth, should be removed to Portugal for that purpose...

Experience, however, shews, that the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connections, and entrust himself with all his habits fixed, to a strange government and new laws, check the emigration of capital.

Gardner Comments:
For England, to produce the cloth that it exports requires 100 man-years To produce the wine that it imports would require 120 man-years. So England can get its wine in a smaller labor cost by importing it.

In Portugal, it takes 80 man-years to produce the wine that it exports But it would take 90 man-years to produce the cloth that it imports. So Portugal gets its cloth at a lower labor cost by importing it.

So Ricardo's formulation of comparative advantage was expressed in term of the labor theory of value. In 1930, Gottfried Haberler (who would leave Germany 6 years later to teach at Harvard) reformulated the theory into its more modern formulation, based on opportunity costs.

Comparative Advantage Example:

Now, suppose after specialization, suppose that Brazil exports 10 tons of coffee and imports 9 tons of steel.

Conclusions:

Ricardo's theory suggests that there's almost always potential for mutually-advantageous specialization and exchange between two individuals or nations, and it pushes back against BOTH  the "cheap foreign labor" and "unequal exchange" arguments for protectionism. On the other hand, it may seem to suggests that an individual or country is unable to change its comparative advantage, and should just accept its fate in the current international division of labor. The early history of the U.S. suggests that it's quite possible for an agricultural country to develop competitive advantages in manufacturing, technology, and services, and China is making similar investments today.

Trade theory and evidence: Gains of winners larger than losses of losers.

Effects on the poor. They lose from immobility, but gain from lower prices.
Cleveland Fed

Changing U.S. attitudes toward foreign trade.

Adam Posen in Foreign Affairs, May/June 2021.
The state can help people and their families move to where there are jobs. It can subsidize faster transportation so that people can commute over longer distances feasibly. It can help people prepare for jobs in growing industries and match them with jobs, too… It can provide a safety net for those who are too old, too unwell, or just too anchored to move. It can copy the active labor-market policies of most European countries, putting in place government programs that enhance incentives to seek employment, improve job readiness, and help people find work.