MALTHUS AND THE LAW OF MARKETS

Malthus's place in the history of economic ideas rests on more than his contribution to the classical analysis of population and of productivity in agriculture. He is also renowned for an important dissent from one aspect of orthodox classical doctrine.

usually been associated with the name of a Frenchman, J. B. Say (1767-1832), though its central idea had been spelled out earlier by James Mill. For that matter, Smith - without arguing the point - had anticipated its conclusions in The Wealth of Nations.

Say's Law has figured so prominently in economic controversies over the past century and a half that the form in which it was originally stated deserves to be set out. It proceeded deductively from two propositions: (1) that products are given in exchange for products; and (2) that goods constitute the demand for other goods.

The significance of the first of these statements lay as much in what was not said as in what was said. By asserting that 'products are given in exchange for products', Say restricted money to the role of a medium of exchange as a catalyst to commerce. Its use, however, did not alter the basic fact about transactions: that they represented exchanges of goods. This was not an original view; Smith and Hume before him had reached essentially the same conclusion. Say regarded this finding as revolutionary, and as demonstrating conclusively the fallacies of a mercantilist view that money was worth acquiring as an asset.

Say's second proposition was to have a marked influence on the development of economic thinking. The statement that 'goods constitute the demand for other goods' was interpreted to mean that the act of producing generates incomes sufficient to buy back the product or, more simply, that 'supply creates its own demand'.

This conclusion rested on an important, though implicit, assumption: that all income was spent and none hoarded. For Say and most writers in the classical tradition, the basic premise was too self-evident to call for detailed argument. As they viewed the world, there was no reason why anyone should ever wish to hoard. After all, no intelligent man (as opposed to the exceptional case of the misguided miser) would accumulate idle balances when he could increase his income by lending the same funds at interest. This attitude was held with the force of dogma by the orthodox classical mind, a phenomenon not unrelated to its antipathy toward the mercantilist attitude that hoarding on a national basis was socially beneficial.

While 'general over-production' was thus ruled out, 'partial over-production'- a situation in which individual firms or industries were unable to dispose of all their output - could clearly occur. Even though an individual producer added as much to total demand as to total supply, he was not thereby assured that all his output would find a buyer. Disturbances might arise - stemming, for example, from entrepreneurial miscalculation or changes in the public taste - that would confront the seller with a partial glut of unsold commodities.

But that was not the end of the matter. It was essential to this argum and when partial overproduction occurred, the disturbance would not- esca glut. The doctrine maintained that if one seller was unable to dispose of all others could be expected to enjoy an abnormally strong demand for theirs.

followed from the condition that all income was spent on either consumption goods or investment goods.

With one further step it could also be maintained that a situation of partial over­production would tend, in the normal course of events, to correct itself.

The tidiness and elegance of this argument gave to it an obvious appeal. But to Malthus, who observed the distresses following the Napoleonic Wars, the impossibility of a general glut was not self-evident. Nor was he confident that the problem was only temporary and remediable through the untampered processes of the market. Producers of many kinds of goods experienced difficulty in disposing of their product and 'unemployment' - at least as measured by registrants for parish relief who numbered nearly one and a half million in 1818 18 - was at an unprecedented level. The glut, he feared, might be both general and chronic.

By modern standards; Malthus's counter-argument was not systematically worked out. His views were developed around a distinction between two categories of outputs - essentials (primarily food) and non-essentials. In the case of the former there was never a problem of glut. As his argument on population had demonstrated, increased supply (in the form of an enlarged availability of foodstuffs) automatically created its own demand (in the form of a larger number of mouths). In the case of the nonessentials, however, the problem was different. Whether or not the market was cleared of these goods depended on the tastes of those - primarily landlords and capitalists - with incomes high enough to acquire them. Malthus might well have added another sub-group (though he did not): the nouveaux rentiers who held the enormously enlarged government debt created by the Napoleonic wars.

Malthus's diagnosis of the 'glut' problem had much in common with the attitude that led him to put little faith in the efficacy of the preventive check to population growth. The tastes and habits of the working class could not be altered except over a prolonged time period, he maintained, nor were those of potential buyers of luxuries likely to be much more pliable. As he elaborated the significance of this point in a letter to Ricardo in 1817:

You seem to think that the wants and tastes of mankind are always ready for the supply; while I am most decidedly of opinion that few things are more difficult, than to inspire new tastes and wants, particularly out of old materials; that one of the great elements of demand is the value that people set upon commodities, and that the more completely the supply is suited to the demand the higher will this value be, and the more days' labour will it exchange for, or give the power of commanding.... I am quite of opinion that practically the actual check to produce and population arises more from want of stimulus than want of power

to produce.20

To deal with these distresses Malthus proposed several heretical remedies. Fearing that - in the absence of extraordinary measures - demand might be insufficient to absorb the product of the economy, he maintained that encouragement of unproductive expenditures was the course of wisdom. In his view it was to society's advantage when the rich (particularly large landowners) augmented their complement of retainers. The results would be even happier if landlords engaged workers who would otherwise be unemployed to improve their estates. In addition, the state - the unproductive spender par excellence - might well undertake public works in order to create jobs. As he summed up his proposals:

And altogether I should say, 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 beautify their grounds, and to employ workmen and menial servants, are the means most within our power and most directly calculated to remedy the evils arising from that disturbance in the balance of produce and consumption, which has been occasioned by the sudden conversion of soldiers, sailors, and various other classes which the war employed, into productive labourers.21

Malthus's views on the problem of gluts in the post-Napoleonic war period have been described as an anticipation of later Keynesian arguments on the importance of aggregate demand to the determination of total income and employment.

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