The Malthusian theory of economic development
Malthus did not regard the process of economic development as automatic. Rather, it required consistent efforts on the part of the people.
He did not conceive of any movement towards the stationary state but emphasised that the economy reached the slump many times before attaining the optimum level of development.
Thus for him, the process of development was one of ups and downs of economic activity rather than smooth.
Malthus was concerned with the “progress of wealth” of a country. By progress of wealth, he meant economic development which could be achieved by increasing the wealth of a country. The wealth of a country depended partly upon the quantity of produce obtained by its labour, and partly upon the valuation of this produce.
But “the, wealth of country does not always increase in proportion to the increase in value, because an increase in value may sometimes take place under an actual diminution 6f commodities.”
In his famous work, Malthus posited his hypothesis that (unchecked) population growth always exceeds the growth of means of subsistence. He argued that while population rises geometrically, food supply increases arithmetically.
Actual (checked) population growth is kept in line with food supply growth by “positive checks” (starvation, disease and the like, elevating the death rate) and “preventive checks” (i.e. postponement of marriage, etc. that keep down the birth rate), both of which are characterised by “misery and vice”.
Malthus’s hypothesis implied that actual population always has a tendency to push above the food supply. Because of this tendency, any attempt to ameliorate the condition of the lower classes by increasing their incomes or improving agricultural productivity would be fruitless, as the extra means of subsistence would be completely absorbed by an induced boost in population.
As long as this tendency remains, Malthus argued, the “perfectibility” of society will always be out of reach. He defines the problem of development as explaining any difference between potential gross national product (“Power of Producing riches”) and actual gross national product (actual riches).
There is nothing automatic about economic growth, Malthus warns. To say that population growth by itself is enough to bring economic advance is absurd.
In the first place, population growth-despite the strength of the psychological and physiological forces tending to bring it down-is an end product of the whole economic process; “an increase of population can not take place without a proportionate or nearly proportionate increase of wealth”.
As evidenced, that the natural tendency toward population growth is no guarantee that either population or income will grow, he cites examples of Spain, Portugal, Hungry, Turkey, “together with nearly the whole of Asia and Africa and the greatest part of America”.
Secondly, mere increases in numbers do not provide a stimulus to economic expansion; population growth encourages development only if it brings an increase in effective demand.
“A man whose only possession is his labour is, or is not, in demand by those who have the disposal of produce”. And the demand for labour, in turn, depends on the rate of capital accumulation.
In elaborating his theory of effective demand and its relations to savings and investment, Malthus anticipated some of the basic ideas of such modern writers as Keynes and Kalecki.
He flatly repudiated ‘Say’s law’, which said in effect that supply creates its own demand and that savings are just a demand for capital goods. Saving in the sense of planned or ex-ante saving or abstinence, means not consuming; and not consuming in itself brings a decline in effective demand, profits and investment.
Malthus drew attentions to a circularity of a kind quite different from the one spelled out by the other classical economists, which has been restated more systematically by Kalecki and others. We have national income (or output) equal to profits plus wages.
As we know that Since workers, as classes are too poor to save, they spend all their income on consumption. Let us denote workers’ consumptions as Cw. Capitalists (Cc), however, do save; these savings create income in so far as they are invested.
So we may write, National income or output is generated by investment, capitalists’ consumption and workers’ consumption. Profit are national income less wages; wages equal worker’s consumption-and so according to Malthus, profits are equal to investment plus capitalists’ consumption.
Malthus, does not, of course, deny the need for saving and investment for economic growth. But he suggests a concept of ‘optimum propensity to save’. Up to a certain point saving is needed to finance (without inflation) the investment for which profitable opportunities exist. Beyond that point, however, saving will reduce.
Consumer spending to such an extent that investment too will be discouraged. High rates of growth do not occur with high levels of ex- ante saving (abstinence) on the part of the upper income groups, but with high levels of ex-post (realised) savings and investment, which are in large degree the result of growth, and do not require reductions in consumer spending. Like Smith and Ricardo, Malthus also believed in free enterprise and considered that the wealth effects of free trade are very high.
Malthus also noted the phenomenon which much later Colin Clark has stressed; economic development entails structural change of a sort which diminishes the relative importance of agriculture in the economy.
He argued that technological progress tends to increase employment and that tapering-off of the growth of income and output causes unemployment. He suggested land reform as one means of expanding output. Malthus envisaged the economy as consisting of two major sectors: industrial and agriculture the latter triggers the growth of the former.
The Malthusian picture of economic development seems to have been one is which capital was invested in agriculture until all the arable land was brought into cultivation, stocked and improved; after that there were no more opportunities for profitable investment in that sector, and investment opportunities existed only is the industrial sector.
Diminishing returns to increased employment on the land could be avoided only if technological progress in the industrial sector was rapid enough, and if enough investment took place, to absorb most of the population growth in the industrial sector and to reduce the cost of living of workers on the land, permitting reductions in their corn (goods) wage rates.
Let us assume once again that the rate of technological progress in the industrial sector depends only on the amount of capital available for utilising the steady flow of improvements.
Malthus explicitly recognised the possibility of unemployment arising from inadequate investment, so the level of industrial employment can also be treated as a function of investment. Thus we can regard industrial output as depending solely on the amount of capital invested in the industrial sector.
The trend of industrial output through time depends only on the rate of capital accumulation (investment) in the industrial sector the rate of investment in turn depends upon the level of profits, as we already know; and in this model, the rate of profits will depend on the wage rate (which is turn depends upon the cost of producing wage goods, especially food stuffs) and effective demand, which depends on capitalists’ consumption and investment.