CHAPTER

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Theory The Malthusian Theory
INTRODUCTION
Thomas Robert Malthus, with whose name the famous Malthusian Theory of Population is associated, showed more appreciation than most of his contemporaries of the importance of distinct and systematic theory of growth.1 His ideas about economic development are found in Book II entitled "The Progress of Wealth of his Principles of Political Economy published in 1820.2

THE THEORY
Concept of 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.
1. B. Higgins, Economic Development, p. 99. 2. T.R. Malthus, Principles of Political Economy, 2/e, 1836. Reprinted 1951.

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 increase in value, because an increase in value may sometimes take place under an actual diminution 6f commodities. Population Growth and Economic Development. In his Principles of Political Economy, Malthus was more realistic in his analysis of population growth in the context of economic development than in his Essay of Population. According to him, population growth by itself is not sufficient to bring about economic development. Rather, it is the result of the development process. As Malthus wrote: An increase of population cannot take place without proportionate increase of wealth. As the rate of capital accumulation increases, the demand for labour also increases. This encourages population growth. But mere population growth does not increase wealth. Population growth increases wealth only if it increases effective demand. And it is increase in effective demand which leads to increase in wealth. Role of Production and Distribution. Malthus regarded production and distribution as the two grand elements of wealth. If they are combined in right proportions, they can increase the wealth of a country in a short time. But if they are taken separately or combined in undue proportions, they may take many thousand years to increase wealth. So Malthus emphasises maximum production and optimum allocation of resources for increasing the wealth of a country during the short run. Factors in Economic Development. Malthus defined the problem of economic development as one of explaining the difference between potential gross national product (power of producing riches) and acutal gross national product (actual riches). But the principal problem is one of achieving a high level of potential gross national product. According to Malthus, the size of potential gross national product depends upon land, labour, capital and organisation. When these four factors are employed in right proportions, they maximise production in the two minor sectors of the economy viz., the agricultural and the industrial secor. It is the accumulation of capital, the fertility of the soil and technological progress that lead to increase in both agricultural and industrial production. Besides these, Malthus also emphasized the importance of non-economic factors in economic development which come under the head of politics and morals. They are the security of property; good constituiion and excellent laws properly administered; and hard working and regular habits and general rectitude of character. Process of Capital Accumulation. Of all the factors, it is the accumulation of capital which is the most important determinant of economic development. The source of capital accumulation is higher profits. Profits come from the savings of capitalists because workers are too poor to save. If capitalists save more and spend less on consumer goods in order to have larger profits, economic growth will be retarded. In fact, Malthus suggested a concept of the optimum propensity to save. To Malthus this meant saving from the stock which might have been destined for immediate consumption, and adding to that which is to yield a profit; or in other words in the conversion of revenue into capital. Thus his conclusion is that saving, pushed to excess, would destroy the motive to production. Deficiency of Effective Demand. This view of Malthus is based on his denial of Says Law of Markets and belief in the deficiency of effective demand. Malthus does not agree with Say that there cannot be a general over production or glut in the market. According to him, it is not at all true that commodities are always exchanged for commodities. In fact, the great mass of

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commodities is exchanged directly for labour rather than for commodities. Since workers, who are consumers, receive less than the value of the product they produce, they cannot buy all commodities. Thus, there is an excess supply of commodities in the market in relation to the demand. This gap between supply and demand cannot be filled even by the demand of capitalists. Capitalists believe in parsimony and deprive themselves of their usual conveniences and luxuries to save from their revenue and add to their capital. By being parsimonious, they employ more productive workers who are consumers and, in turn, are not able to buy all commodities they produce. Thus there is general over-production and glut of commodities in the market due to the deficiency of effective demand or under-consumption. This leads to fall in prices, profits, saving, investment and capital accumulation. Economic Stagnation. Malthus believed that the supply of labour is inelastic in the short run. He wrote: From the nature of population, an increase of labourers cannot be brought into the market, in consequence of a particular demand, till after the lapse of sixteen or eighteen years. But the supply of capital can be increased faster than increase of population. As capitalists invest on productive labour to increase the supply of capital, wages rise due to competition. Rise in wages do not increase effective demand because workers prefer leisure to increased consumption. So there is a general glut of commodities. As a result, prices fall, profits decline, investment falls, and both the power of accumulation and the motive to accumulate are strongly checked. Thus gluts and under consumption would lead to economic stagnation. MEASURES TO PROMOTE ECONOMIC DEVELOPMENT Malthus made several policy recommendations to promote economic development: (1) Balanced Growth. In the Malthusian system, the economy is divided into agricultural and industrial sectors. It is technological progress in these two sectors that can lead to economic development. Capital is invested in agriculture until all the arable land is brought under cutivation, stocked and improved. After that there are no more opportunities for profitable investment in that sector due to diminishing returns. Therefore, investment opportunities exist only in the industrial sector. Diminishing returns to increased employment in the land can be avoided only if technical progress in the industrial sector is rapid enough, and if investment takes 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 reduction in their wage rates.3 Thus, Malthus favoured balanced growth of bothagricultural and industrial sectors foreconomic development of the country. (2) Raising Effective Demand. But technical progress alone cannot lead to economic development unless effective demand increases. Malthus suggested a number of measures to increase effective demand. First, by more equitable distribution of wealth and landed property. Thirty or forty proprietors with income averaging between one thousand and five thousand a year, would create a much more effective demand for wheat, bread, good meat, and manufactured products, than a single proprietor possessing a hundred thousand a year: Thus Malthus believed that a few moderately rich people can raise effective demand more than one millionaire among the poor masses. Further, he favoured a more equitable distribution of landed property for that would increase effective demand, as well as, production. According to Malthus, if the division of land into small proprietors, is carried to an extreme, it would adversely affect the production.
3. B. Higgins, op: cit., p. 103.

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Second, effective demand can be increased by the expansion of internal and external trade. It is internal as well as external trade that increases wants and tastes and the desire to consume, which are absolutely necessary to keep up the market prices ot commodities and prevent the fall of profits. Internal and external trade also increases the value of products by exchanging what is wanted less for what is wanted more. Third, Malthus suggested the maintenance of unproductive consumers to increase effective demand. He defined unproductive consumers as those persons who did not produce material objects. It is under-consumption which leads to gluts and stagnation in the country. Therefore, production can be raised by increasing consumption. Since capitalists are parsimonious and productive workers live upon subsistence wages, unproductive consumption upon the part of unproductive labourers and landlords will increase effective demand. Lastly, Malthus suggested public works schemes to remove unemployment and increase effective demand. Malthus pointed out that the employment of the poor in roads and public works and a tendency among landlords and persons of property to build, to improve and to beautify their grounds, and to employ workmen and menial servants, are the means . . .to remedy the evils arising from that disturbance in the balance of produce and consumption. But he himself noted two weaknesses of this measure. (i) it might prevent labour from gradually accommodating itself to a reduced demand. He thought that it could be remedied by giving low wages to workers. (ii), it would necessitate increase in taxes to finance public works which would reduce private investment. But this weakness was in fact the advantage of public works because it would not have the tendency to diminish the capital employed by productive labour. Stationary State. According to Malthus wage has the tendency to maintain the living standard stable so that families of workers can subsist on this. Whenever the wage rate is more than the minimum, the working population will increase at a fast rate because the labour power will grow and the living standard will be high. Ultimately, the tendency of diminishing returns will apply and the demand and supply sustenance level. It can be said that in a progressive system, there is high level of investment that generally helps in raising total production which keeps the wages high and further increases the population. As the quantity of level is fixed, additional labour force leads to diminishing returns. When population increases, wage reduces the profitability of investment till the propensity to invest does not end and the economy reaches the stationary state. Malthus stationary state is depicted in Fig. 1. Where SW is the standard of living line and the curve LL1 is the real living standard which reflects the quantity M of population in relation to constant quantity of other resources. The shape of the LL1 curve shows that in the initial stage population increases alongwith wage D S W which leads to high standard of living. The highest level of this curve is M where the optimum L population is OP and PM is high living standard. L1 After point M, the LL, curve slopes downward. This O P P1 is because when population increases alongwith Population constant other resources, there is the tendency of Fig. 1 diminishing returns. Standard of Living

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According to Malthus when the working population is at the subsistence level, there is no tendency of its increasing or decreasing. In the figure, OS is the level of living standard at which OP1 is the equilibrium level of population. It population increases beyond OP1, the real living standard will be below the subsistence level. Population will decline and the subsistence level will rise. If, on the other hand, population declines below OP1, the real living standard will be higher than the subsistence level which will lead to increase in population and the real living standard will fall. In this way, the subsistence level will reach the stationary state in the long run. Conclusion. To sum up, in the Malthusian theory it is underconsumption or deficiency in effective demand leading to gluts which is the main cause of underdevelopment. For development, the country should maximise production in the agricultural and industrial sectors of the economy. This requires technical progress, equitable distribution of wealth and land, expansion of internal and external trade, increase in unproductive consumption, and increase in employment opportunities through public works schemes. Besides, there are non-economic factors like education, moral standards, hard working habits, good administration and efficient laws which help in increasing production in the two sectors of economy. Thus these economic and non-economic factors lead to economic development. A CRITICAL APPRAISAL Keynes claimed Robert Malthus as the first of the Cambridge Economists. Rightly so. For he was Keyness precursor. He also anticipated Kalecki. It was Malthus who denied Says Law of Markets and laid emphasis upon the importance of effective demand. He pointed out the factors which hinder and promote economic development. In particular, he pointed out the importance of technological progress, equitable distribution of wealth, internal and external trade, public works programme, good administration, hardwork, and balanced growth. These measures have come to be recognised as the main planks of modern economic growth. Despite all these virtues, Malthuss theory has certain weaknesses: 1. Secular Stagnation not Inherent in Capital Accumulation. Malthus argues that the process of capital accumulation leads inherently to secular stagnation. This is a wrong notion which arises from his interpretation of Says law. For Malthus there is the possibility of permanent underconsumption of all commodities. But the fact is that underconsumption is not a permanent phenomenon but a temporary one. So secular stagnation is not inherent in the process of capital accumulation. 2. Negative View of Capital Accumulation. Malthuss view that capital accumulation leads inherently to secular stagnation, is not correct from another angle. In actuality, capital accumulation does not lead to a reduction in the demand for consumer goods and fall in profits. As capital accumulation increases, the share of wages and profits in aggregate income increases, and so does the demand for consumer goods. Thus Malthus had a negative view of the process of capital accumulation. 3. Commodities not Exchanged for Commodities Directly. Again, Malthus, in denying Say argues that commodities are not exchanged for commodities, but they are exchanged for labour. In fact, labour is not a correct measure of commodities. In the real world, commodities are measured by real tangible prices and not by labour. 4. Unproductive Consumers Retard Progress. Another serious weakness of Malthuss theory is that he suggests spending by unproductive consumers to overcome underconsumption

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and increase effective demand. This remedy tantamounts to giving doles to workers and deliberately supporting idle persons. Such a measure slows down the rate of capital accumulation. 5. One-Sided Saving Base. Like Smith, Malthus had a one-sided base of savings. He believed that it is only the landlords who save. But this is an erroneous view because the major source of savings in a society is the income-earners and not profit-earners. ITS APPLICABILITY TO UNDERDEVELOPED COUNTRIES Malthus was one of the pioneers in the field of economic development who wrote about the poverty and underdevelopment of underdeveloped countries of his times in his Principles of Political Economy. He wrote about the economic backwardness of such countries as Spain, Portugal. Hungary, Turkey, Ireland, together with nearly the whole of Asia and Africa, and of Latin Americancountries. Hence his theory of economic development has more relevance to underdeveloped countries of today than the theories of other classical writers. Malthuss division and analysis of an economy into the agricultural sector and the industrial sector is highly realistic in the context of underdeveloped countries. Underdeveloped countries are duaistic economies where the agricultural sector lags behind the industrial sector. Despite technological progress the former sector is subject to the Law of Diminishing Returns. The latter sector operates under the law of increasing returns. Consequently, the agricultural sector retards the progress of the industrial sector. His analysis of the causes of poverty is highly realistic in the context of the present day underdeveloped countries. For him, poverty of the peasantry is not due to the scarcity of fertile land. It is found because peasants do not have capital to make improvements on land. On the other hand, large landowners do not practise intensive cultivation due to the small size of the market. Since the bulk of the population subsists on labour-intensive agriculture. It is poor. Therefore, its demand for industrial output is low. The industrial sector remains limited in size and it fails to provide sufficient employment. Thus each sector acts as a drag on the growth of the other. Consequently peasants, landlords, workers and industrialists have a backward sloping supply curve of effort. The above analysis of Malthus appears like the conditions prevailing in any backward country of Asia, Africa or Latin America. The relation which Malthus established between population growth and econoinic development is fully applicable to underdeveloped countries. According to him, in countries where population alone increases, the increase in wealth is the slowest. This has amply proved true in the Asian and African countries. The views of Malthus relating to factors which promote development are fully applicable to underdeveloped countries. None can deny the role of production, optimum distribution, capital accumulation, the fertility of soil, and technological progress, and of such non-economic factors as good administration, excellent laws, hardwork, honesty of character, etc. in promoting the development of such countries. Besides, some of the policy measures suggested by Malthus are also applicable to underdeveloped countries. He stressed the importance of structural changes to diminish the relative importance of agriculture; of land reforms; of balanced growth of agriculture and industry; of expanding internal and external trade to widen thexmarket; of equitable distribution of wealth and land; and of public works programme. These measures are found in the

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development plans of all underdeveloped countries. But there are certain portions in the Malthusian theory which are not applicable to underdeveloped countries. First, the Malthusian theory of underconsumption does not have any relevance to such countries. In the Malthusian analysis underconsumption implies an abundance of non-marketable goods due to deficiency of effective demand. In the case of underdeveloped countries, it refers to the low level of consumption due to low level of production. Second, Malthus maintained that lack of effective demand was due to parsimony of capitalist. The remedy, he suggested, was unproductive consumption on the part of capitalists and unproductive workers. All these are not applicable to conditions prevailing in underdeveloped countries. In an underdeveloped country, income levels are extremely low, propensity to consume is very high and savings are negligible. Here the problem is not of raising effective demand through increased consumption, for it will lead to inflation. Rather, the problem is to raise the levels of employment, income, and saving for development.