What it is:
David Ricardo was an English classical economist and one-time member of the country's Parliament who lived from 1772 to 1823. He is the author of The Principles of Political Economy and Taxation and other books.
How it works (Example):
David Ricardo pioneered the free trade theory, which states that people free of regulation will negotiate agreements that benefit them. Regulation only diminishes those benefits. Ricardo argued that Marx's concerns about concentrations of capital were unwarranted because those concentrations created opportunities for startups to undermine them.
Ricardo also pioneered the idea of diminishing marginal returns, which states that as more resources are applied to a fixed resource, the additional output will fall. As more land is cultivated, farmers would have to begin using less productive land, for example.
Additionally, Ricardo studied the idea of comparative advantages between countries. That idea states that countries will be better off if they buy products from other countries if they can do so a lower cost than if they made the products at home. Countries are better off specializing in producing what they're good at and trading for the rest, largely because the opportunity cost of spending time producing other things is very high.
Why it Matters:
Ricardo is one of the principle creators of Classical Economic Theory, which rose between the mid-1700s and the mid-1800s. Adam Smith, Thomas Malthus, John Stuart Mill and Karl Marx were other prominent classical economists during that time. Classical economics revolved around the idea that every individual has certain inalienable rights and that governments can only exist with the consent of the governed. It is the basis of modern democracy and capitalism.