Transcript Malthus’ Theory of Gluts (Depressions)

Malthus’ Theory of Gluts
(Depressions)
Thomas Robert Malthus (17621834
• Best known for his theory of population.
• Much less known is that Malthus was one
of the first economists to address the
phenomena of economic crises, which he
referred to as gluts.
Historical Backdrop
• The specific historical factor that Malthus
was addressing was the depression
following the Napoleonic wars beginning in
1820.
• The depression lasted 7 years, and Ricardo
admittedly had no clue as to its cause.
Assumptions
• Effective demand determines the level of
output.
– Effective demand = government spending +
consumption spending (spending on
consumption by landowners, capitalists, and
workers)
• Rejects Say's law:
–  saving   consumption by capitalists  
effective demand   output
Assumptions (continued)
• Land is fixed and differs in fertility
• three classes:
– landowners
– capitalists
– workers
Class
Workers
Economic Function
Work
Landowners
Spend
Capitalists
save, accumulate
capital, and organize
production
Income
wages (subsistence
wage)
rents
profits
Determination of Income
Malthusian theory of population
Difference between the output on the most
and least fertile lands in cultivation
1. Residual after paying wages and rents
2. Competition among capitalists equalizes
the rate of profit in all industries
Short-run Implications:
• The Corn Laws increase the price of
agricultural products. This in turn makes
profitable the cultivation of marginal
(inferior) land.
• This increases competition for more fertile
lands, bidding up rents.
•  rents   landowner spending  
effective demand   output
Policy recommendation:
• Intervention. Keep the corn laws, thereby
redistributing income to the landowners,
increasing rents, and increasing spending.
– landowners are the key to economic progress.
– God has put the landowners here as the
provider of culture and progress.
Income distribution and
production
• Income distribution (relations in
distribution) is a way to influence capital
accumulation (and relations in production).
• Relations in production and distribution are
independent.
• Distribution is used to influence production,
but not the reveres.