Essentials of Economic Development given by Malthus

T.R. Malthus formed the trinity of pessimistic economists. He pioneered the theory of population which was more precise and significant than his views on growth.

In his opinion, no enquiry could be more important than that which traced the causes of any difference between potential and actual outputs of a country.

According to him, population growth is an end product of the whole process of economic development but the increase in population cannot take place without proportionate increase in wealth. Mere increase in population cannot provide a stimulus to economic expansion. Population growth encourages development only if it brings an increase in effective demand.

The demand for labour depends on rate of capital accumulation. Malthus does not deny the need of savings and investment for economic growth but he suggests a level of optimum propensity to save. Thus, Malthus had a picture of an advanced economy enjoying growth with consumption, investment and savings expanding together.

Concept of Development:

Malthus contends that the process of growth is not automatic but it needs a deliberate effort on the part of the people. He did not conceive any movement towards stationary state but he emphasized that the economy reaches slump many a times before attaining the optimum level of development. Thus, the process of development consists of many ups and downs and it is not smooth.

Malthus was concerned with the progress of wealth and the wealth of a country depends partly on the quantity of production obtained by its labour and partly on the valuation of the produce. But “the wealth of country does not always increase in proportion to increase in value because increase in value may sometimes take place under an actual diminution of commodities.

Population Growth and Economic Development:

Prof. Malthus was first to introduce a new branch of study in economics and to give an impulse to the serious study of that branch. His principle of population states that population grows more rapidly than food supply. Malthusian theory of population is based on the theory of differential rent in which he emphasized the law of diminishing returns in agriculture. Population growth increases wealth only if it increases effective demand and it is the increase in effective demand which leads to increase in wealth.

Role of Production and Distribution:

Malthus regards production and distribution as two major elements of wealth. If they are combined in an appropriate proportion, the wealth of a country can be increased in a very short time. But if they are taken separately, it may take thousands of years to increase the wealth. Thus, the potentialities of economic development in a country should be raised by large production and fairer distribution.

Factors in Economic Development:

He defines the problem of development as explaining the difference between potential gross national product and actual gross national product. Malthus does not believe in any long run theory, he is concerned with the short period fluctuations of wealth. But the principal problem is one of attaining a high level of potential gross product.

According to Malthus, the size of potential gross national product depends upon land, labour, capital and organisation. When these four factors are combined in right proportion, they maximize the production in two major sectors viz. the agricultural sector and the industrial sector of the economy.

The increase in agricultural and industrial production can be made by accumulation of capital, fertility of soil and technological progress. Despite this, he also emphasizes the importance of non- economic factors in economic development. They are the security of property, good constitution and excellent laws properly administered and hard working and regular habits. He observed “… there is little reason to apprehend any permanent evil from the increase in machinery”.

Capital Accumulation:

The accumulation of capital is the most important determinant of economic growth. He regards capital as indispensable to development. According to him, “No permanent and continued increase of wealth can take place without its increase of capital”. The main source of capital accumulation is higher profits and they come from the savings of the capitalists because workers are too poor to save. If the capitalists save more and spend less on consumer goods in order to have higher profits, economic growth will be retarded. Malthus suggested the concept of optimum propensity to save.

This means, “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… the conversion of revenue to capital”. He concluded that excess of savings would destroy the motive of production.

Malthus underlined the importance of foreign trade in speeding up economic growth. It provides incentive for investing since it leads to the extension of the market for goods produced and for greater division of labour resulting in increased output.

Role of Effective Demand:

Malthus regarded the role of effective demand in economic growth. He refuted the Say’s Law of Market and over-ruled the concept that there can’t be general over production. Malthus was of the opinion that the law of demand and supply determines the value of a commodity, though he continues to regard labour commanded by commodity as the best measure of its value. Productive labour creates economic surplus over and above the labour costs.

It produces commodities which command greater labour than is embodied in their production. Production of labour brings profits into existence but these profits can only be realized if there is an effective demand. Thus, production depends upon effective demand and over production is the result of deficiency of effective demand.

The employment of productive labour is the source of insufficiency of effective demand which, in turn, results in general over production and unemployment in the economy. Since productive labour produces commodities which command greater labour than is required to produce them, labourers will receive less than the value of commodities they produce and wages will form only a part of total price of produce. Thus, the workers are unable to purchase all commodities in the market.

On the other hand, capitalist being parsimonious in nature prefer to save rather to spend. Thus, an unsold stock of commodities tends to increase in the market which can be purchased neither by productive labourers nor by capitalists. This is how the deficiency of effective demand creates the situation of over production and it leads to fall in prices, profits, savings, investment and capital accumulation.

Economic Stagnation:

Malthus believed that supply of labour is inelastic in short run. He wrote “From the nature of population, and increase of labourers can’t be brought into market, in consequence of a particular demand, till after the lapse of sixteen or eighteen years”. The supply of capital can be increased faster than the increase in population.

As capitalist invests on productive labour to increase supply of capital hence wages rise due to competition. Rise in wages does not increase effective demand because workers prefer leisure to increased consumption. 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 leads to economic stagnation.